The Tax-Exemption Process
- Use the most current version of the form
- Nonprofit versus tax-exempt status
- Types of entities eligible for tax-exempt status
- Types of exemptions
- Applying for tax-exempt status
- Processing time frames
- Retroactive tax-exempt status
- Where to file
- Disclosure of application materials
- Filing requirements
Use the most current version of the form
Use the most current version of the FTB 3500 or FTB 3500A. The use of a prior version of the form or failure to provide all requested information may delay the exemption application process.
Nonprofit versus tax-exempt status
A nonprofit entity does not have shareholders or owners, except as provided in R&TC Sections 23701h and 23701x. We characterize a nonprofit organization according to how it is created.
When an organization incorporates with the Secretary of State's (SOS) office, the articles of incorporation specify nonprofit or domestic stock.
- Domestic stock allows one to keep the proceeds from the organization's business activities for personal use.
- Nonprofit organizations are not allowed to keep the proceeds; the proceeds must be used for nonprofit purposes.
Nonprofit corporations incorporate through SOS under one of the following parts of the California Nonprofit Corporation law:
- Nonprofit Public Benefit Corporations.
- Nonprofit Mutual Benefit Corporations.
- Nonprofit Religious Corporations.
An unincorporated association is nonprofit if its creating document contains nonprofit language. A creating document may be one of the following types of documents:
- Articles of association.
- Trust instrument.
- Other documents that set forth how the association will operate.
Tax-exempt means the organization is not required to pay taxes on the money the organization receives related to its exempt activities. The organization must apply and qualify for California tax-exempt status.
Types of entities eligible for tax-exempt status
- Entities that generally do not have shareholders
- Domestic nonprofit corporations
- Foreign nonprofit organizations
- Certain Limited Liability Companies (title holding organizations under 23701h & 23701x)
- Nonprofit unincorporated associations
- Qualifying trusts
Note: Qualifying organizations that may have shareholders include 23701h, 23701x, 23701t (cooperative housing corporations), and 23701v (stock cooperatives).
A public benefit organization must be formed for public or charitable purposes and may not be organized for the private gain of any person. A public benefit organization cannot distribute profits, gains, or dividends to any person.
An organization that is most often organized for the benefit of its own members. It may not be formed exclusively for charitable purposes. If a mutual benefit corporation holds some of its assets for charitable purposes, it registers and reports on the charitable assets to the Attorney General of the State of California.
Organizations whose purpose is the study or advancement of religion.
Organizations that incorporate outside of California, in another state or country.
Limited Liability Companies under Revenue and Taxation Code (R&TC) Sections 23701h and 23701x
- Qualifying title-holding organizations are generally stockholding organizations. Refer to IRC Section 501(c)(2) and 501(c)(25).
- California does not allow single member limited liability companies (LLC) tax-exempt status under R&TC Section 23701, except 23701h and 23701x (title holding organizations).
- LLCs must elect to be treated as a corporation to be granted tax-exempt status under R&TC Sections 23701, except for 23701h and 23701x.
Nonprofit unincorporated associations
- All unincorporated associations, even if organized on a nonprofit basis, are subject to California income tax, until Franchise Tax Board grants tax-exempt status.
- An unincorporated association that has tax-exempt status must reapply for exemption if it incorporates.
- Unincorporated Homeowners’ Associations are not subject to franchise minimum tax and may derive no benefit by being tax-exempt.
Trusts must include a copy of their federal determination letter before we grant California tax-exempt status.
Other trusts not under Section 23701 that may qualify for tax-exempt status include Pension Trusts, IRAs, IRC Section 4947(a)(1), and Coverdell Trusts.
Processing time frames
FTB 3500, Exemption Application – approximately 90 days from received date.
FTB 3500A, Submission of Exemption Request – approximately 90 days from received date.
Retroactive tax-exempt status
FTB 3500, Exemption Application
Retroactive tax-exempt status is determined by the entity’s organizational structure and operations within the provisions of its exempt code section. An inactive organization is not entitled to tax-exempt status.
FTB 3500A, Submission of Exemption Request
For state income tax purposes, the effective date of an organization's tax-exempt status shall be no later than the federal effective date. If the federal effective date is later than the incorporation date, the organization should consider filing FTB 3500, Exemption Application.
ABC organization incorporated on 10/01/1999.
Federal exempt status effective date is 01/01/2002.
ABC organization filed FTB 3500A.
California’s effective date for ABC organization is 01/01/2002. To avoid the minimum franchise tax or income tax, ABC organization must file FTB 3500, Exemption Application, to request an exemption retroactive to 10/01/1999.
You may receive a refund if your organization receives tax-exempt status and you have paid franchise or income tax before tax-exempt status was granted or acknowledged. The refund depends on the retroactive date of exemption and any unrelated business income tax due.
We will issue any refunds due once we grant or acknowledge tax-exempt status.
Any refunds due would be issued for the tax years that franchise or income tax was paid within the statute of limitations.
Where to file
FTB 3500, Exemption Application or FTB 3500A, Submission of Exemption Request
Exempt Organizations Unit MS F120
Franchise Tax Board
PO Box 1286
Rancho Cordova CA 95741-1286
We may not disclose to the public the business and financial matters of a tax-exempt organization while we consider the exemption application; however, once we grant or acknowledge tax-exempt status, we may disclose information included with FTB 3500 or FTB 3500A. If we deny exemption, then that information remains confidential. If an organization’s tax-exempt status is revoked, then that information is available to the public.
Upon the organization’s request, public disclosure of documents relating to any trade secrets, patents, process, style of work, or apparatus may be withheld if we determine that disclosure would adversely affect the organization. Additionally, public disclosure of documents may also be withheld if the disclosure would adversely affect national defense.
For a copy of the FTB 3500 or 3500A write to:
DISCLOSURE OFFICE MS A181
FRANCHISE TAX BOARD
PO BOX 1468
SACRAMENTO CA 95812-1468
You can also fax your request to 916.845.4849.
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