FTB 927 Publication Introduction to Tax-Exempt Status Revised: 12/2020

Introduction

Tax-exempt organizations are commonly referred to as nonprofit organizations. Although tax-exempt organizations are generally nonprofit, some are for-profit. This publication explains:

• How to get tax-exempt status.
• Who qualifies for tax-exempt status.
• Filing requirements.
• Other information tax-exempt organizations need to know.

Nonprofit vs. Tax-Exempt Status

Nonprofit and tax-exempt are not the same. When an organization incorporates with the Secretary of State’s (SOS) office, the articles of incorporation specify domestic or nonprofit:

• Domestic stock allows individuals to keep the proceeds from the organization’s business activities for personal use.
• Nonprofit organizations are not allowed to keep the proceeds; they must use the proceeds for nonprofit purposes.

Nonprofit corporations generally 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 may be a nonprofit if its creating document contains specific language. A creating document may be one of the following document types:

• Articles of association.
• Bylaws.
• Constitution.
• Trust instrument.
• Other documents that describe forth how the association will operate.

We consider a tax-exempt organization as a corporation, unincorporated association, or a trust that submits to us one of the following:

• California Form FTB 3500, Exemption Application, and received our determination letter that states it is exempt from California franchise or income tax (California Revenue and Taxation Code (R&TC) Section 23701).
• California Form FTB 3500A, Submission of Exemption Request, a copy of the federal determination letter issued by the Internal Revenue Service (IRS) that approves the organization’s tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19), and received our acknowledgment letter that states it is exempt from California franchise or income tax (R&TC Section 23701).

A nonprofit organization 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 was created.

Tax-exempt means the organization is not required to pay California franchise or income taxes on the money the organization receives related to its exempt activities.

Incorporation as a Nonprofit Corporation

Incorporating under the California Nonprofit Corporation law does not mean the organization is tax-exempt from California corporation taxes, regardless of the language in the Articles of Incorporation or the organization’s status for federal purposes.

A nonprofit corporation that does not have an exempt determination or acknowledgment letter from us is subject to the same franchise or income tax laws as any for-profit corporation. It must file Form 100, California Corporation Franchise or Income Tax Return, with us and pay at least the minimum franchise tax each year until it formally dissolves through SOS.

Unincorporated Associations

If an unincorporated association does not apply for tax-exempt status, it files Form 100, California Corporation Franchise or Income Tax Return, with us and computes its tax using the general corporation tax rate. It does not pay the minimum franchise tax.

Confidentiality

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, the organization’s name and revocation date is available to the public.

Federal and State Disclosure Law

Federal law regarding disclosure of information about tax-exempt organizations is different from California law. Federal law requires IRS to disclose certain business details and financial information.

California law does not allow us to disclose financial information included in tax and information returns filed.

Tax-Exempt Status and Federal Exemption

Although most California laws that deal with the tax exemption patterned after IRC, obtaining state tax-exempt status is a separate process from obtaining federal exemption. To obtain state tax-exempt status, submit to us one of the following:

• FTB 3500, Exemption Application.
• FTB 3500A, Submission of Exemption Request, if you obtained federal exemption under IRC Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19).

If you do not obtain state tax-exempt status for your organization, it remains subject to the California R&TC as a taxable organization.

Previously tax-exempt entities that were revoked by us must file the California FTB 3500 to reinstate their tax-exempt status.

All nontax-exempt corporations incorporated or qualified in California are required to pay at least the $800 minimum franchise tax whether they are active, inactive, operate at a loss, or file a short-period tax return (less than 12 months).

The following types of nonprofit entities are required to obtain a federal determination letter prior to receiving California tax-exempt status with Franchise Tax Board (FTB):

• Foreign nonprofits (organized in states other than California).
• Qualified charitable trusts under R&TC Section 23701d (IRC Section 501(c)(3)).
• Nonprofit cooperatives under R&TC Section 23701a (IRC Section 501(c)(5)).
• Voluntary Employee Benefit Associations under R&TC Section 23701i (IRC Section 501(c)(9)).
• Organizations using FTB 3500A.

Prior to receiving California tax-exempt status, FTB may require nonprofit organizations to obtain a federal determination letter. This is based on facts and circumstances on a case-by-case basis.

State and Federal Differences

California law differs from federal law regarding exempt organizations. Explanation of major differences are as follows:

Contact IRS for information regarding federal tax exemption. The following federal forms may be helpful:

• Pub 557, Tax-Exempt Status for Your Organization.
• Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.
• Form 1024, Application for Recognition of Exemption Under Section 501(a).

Limited Liability Companies

Limited Liability Companies (LLC) seeking tax-exempt status must be owned and operated exclusively by a nonprofit organization. LLCs who have members that are a stock corporation or individuals are not permitted tax-exempt status.

An LLC that is owned and operated exclusively by nonprofit organizations is eligible for tax-exempt status with the Franchise Tax Board if it meets one of the following:

• Taxable as a corporation with the Internal Revenue Service (IRS) and operates consistently within the desired California Revenue and Taxation Code (R&TC) section under 23701.
• Qualified for tax-exempt status under R&TC Section 23701h or 23701x as a title holding company.

Once the LLC meets the eligibility, it must apply for tax-exempt status using California Form FTB 3500, Exemption Application, and must provide proof that the IRS has accepted the IRS Form 8832, Entity Classification Election.

Apply for Tax-Exempt Status

Get Tax-Exempt Status

To receive tax-exempt status in California, the organization files one of the following with FTB:

• FTB 3500, Exemption Application, and received our determination letter that states it is tax-exempt from California franchise or income (R&TC Section 23701).
• FTB 3500A, Submission of Exemption Request, a copy of the federal determination letter issued by the IRS approving the organizations tax-exempt status under IRC Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19), and received our acknowledgment letter that states it is tax-exempt from California franchise or income tax (R&TC Section 23701).

Reinstate Tax-Exempt Status

File FTB 3500 and all supporting documents.

You cannot use FTB 3500A to reinstate your tax-exempt status.

FTB 3500, Exemption Application

The General Questions must be completed by all organizations:

• I. Organization Structure
• II. Narrative of Activities
• III. Financial Data
• IV. Officers, Directors, and Trustees
• V. Organization's History
• VI. Fundraising Activity
• VII. Specific Activities

In addition to the General Questions, all organizations must complete only one Schedule for the Specific Section Questions.

You must include all of the following documents:

• Domestic corporations (organized in California)
  • Articles of Incorporation and any subsequent amendments
  • Bylaws or Code of Regulations
• Foreign corporations (organized outside of California)
  • If qualified in California-Statement and Designation by Foreign Corporation or Certificate of Qualification
  • Home state Articles of Incorporation
  • Bylaws or Code of Regulations
  • Federal Determination Letter
• Unincorporated associations
  • Articles of association and/or bylaws with creating document language
  • Constitution and/or bylaws with creating document language
  • Other documents that describe how the association will operate
• Trusts
  • Trust Instrument
  • Federal Determination Letter
• Limited liability companies (LLCs) organized in California, for R&TC Sections 23701h and 23701x (title holding organizations):
  • Articles of Organization (LLC-1) and any amendments
  • Operating Agreement
• Foreign LLCs registered in California, for R&TC Sections 23701h and 23701x (title holding organizations)
  • Articles of Organization (LLC-5) and any amendments
  • Operating Agreement

For R&TC Sections other than 23701h and 23701x (title holding organizations):

The LLC must submit an approved Form 8832, Entity Classification Election, from the IRS (taxed as a corporation) in addition to the above documents. The LLC must meet the organizational and operational requirements of R&TC Section 23701.

FTB 3500A, Submission of Exemption Request

Organizations filing FTB 3500A with exemption based on IRC Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19), Federal Determination Letter, must:

• Submit a completed FTB 3500A.
• Include a copy of your organization’s Internal Revenue Federal Determination Letter.

Organizations whose tax-exempt status was revoked by us must use FTB 3500 to reapply for tax-exempt status.

Filing Requirements

If your organization is tax-exempt for California purposes, you may need to file one or more of the following with us:

• Form 199, California Exempt Organization Annual Information Return.
• FTB 199N, California e-Postcard.
• Form 109, California Exempt Organization Business Income Tax Return.
• Form 100, California Corporation Franchise or Income Tax Return.

For detailed information about state filing requirements, fees, and penalties, refer to Pub. 1068, Exempt Organizations – Filing Requirements. Go to ftb.ca.gov/Forms and search for 1068.

Determine if you need to file Form 199 or FTB 199N

The amount of your normal gross receipts determine your filing requirements.

The gross receipts are reported on the Form 199 or FTB 199N. We define gross receipts as the total amounts the organization received from all sources during its annual account period–without subtracting any costs or expenses (includes costs of goods sold, costs of operations, or expenses to earn, raise, or collect such amounts).

To determine your gross receipts average, use the following charts.

Tax Year 2012 to present gross receipts average of $50,000

Tax Years 2011 and prior gross receipts average of $25,000

Use the following chart to determine your filing requirements based on the gross receipts average.

Organizations eligible to file FTB 199N may choose to file a complete Form 199.

FTB 199N, California e-Postcard

Tax-exempt organizations with normal gross receipts below the Form 199 filing threshold file electronically an annual informational notice with us. However, organizations eligible to file FTB 199N may choose to file a complete Form 199 instead. (R&TC Section 23772)

You cannot file FTB 199N for a tax year prior to 2010. If you need to file for a tax year prior to 2010, you must file Form 199.

There is no cost to file FTB 199N. If your average gross receipts threshold is greater than the allowable threshold, we may send you a bill.

Due Date

You must file FTB 199N on or before the 15th day of the 5th month after the close of your organization’s tax year. For example, if your tax year ends on December 31, the due date is May 15. If the due date falls on a weekend or state holiday, file by the next regular business day.

Extension of time to file

There is no extension of time to file.

Form 199, California Exempt Organization Annual Information Return

Private foundations must file a complete Form 199. However, private foundations may complete Side 1 of Form 199, and provide one of the following as substitute information for Part II:

1. A complete copy of federal Form 990-PF, with appropriate schedules.
2. A complete copy of the current report filed with the Registry of Charitable Trusts, include federal Form 990.

Due Date

You must file Form 199 on or before the 15th day of the 5th month after the close of your organization’s tax year. For example, if your tax year ends on December 31, the due date is May 15. If the due date falls on a weekend or state holiday, file by the next regular business day.

Extension of time to file

An extension allows you more time to file the return, not an extension of time to pay any fees due.

We will grant an automatic six-month extension to file a return if both of the following conditions exist:

• Your organization is not suspended on the original filing due date.
• You file your organization’s return on or before the extended filing due date.

Filing Fee

For returns due on or after 01/01/2021, no filing fee is required.

For returns due prior to 01/01/2021, refer to the following information.

Generally, if you file Form 199, you pay a fee with the return. The amount depends upon when you file and when you make your payment (R&TC Section 23772).

Exceptions

The filing fee does not apply to the following organizations exempt under R&TC Section 23701d:

Delinquent Form 199 Penalty

We impose a penalty if you do not file your organization’s Form 199 by the extended due date regardless of whether you pay the fee. The penalty is $5 per month or part of a month the Form 199 is late. The maximum penalty is $40. We impose the penalty from the original due date of the return. (R&TC Section 23772)

Organizations exempt from the filing fee are not exempt from this penalty.

Form 109, California Exempt Organization Business Income Tax Return

Generally, a tax-exempt organization files Form 109 when its income exceeds $1,000 from a trade or business unrelated to its exempt purposes — even if the profits are used for exempt purposes.

Exception: Homeowners’ associations and political organizations file Form 100 instead of Form 109 if they have taxable income.

Tax Rate

The computed tax rate depends on how the organization was created.

• An incorporated organization or an unincorporated association computes its tax using the general corporation tax rate.
• A trust computes its tax using the appropriate trust tax rate.

Due Date

The due date for filing Form 109 depends on how the organization was created.

• An incorporated organization, unincorporated association, or a trust (other than a pension trust or IRA) files on or before the 15th day of the 5th month after the close of its tax year. For example, if the tax year ends on December 31, the due date is May 15.
• A pension trust or IRA files on or before the 15th day of the 4th month after the close of its tax year. For example, if the tax year ends on December 31, then the due date is April 15.

We impose the same types of penalties and interest on California tax-exempt organizations as we impose on for-profit corporations.

Extension of time to file

An extension allows you more time to file the return, not an extension of time to pay any fees due.

We will grant an automatic six-month extension to file a return if both of the following conditions exist:

• Your organization is not suspended on the original due date.
• You file your organization’s return on or before the extended due date.

Form 100, California Corporation Franchise or Income Tax Return

Homeowners’ associations and political organizations with income in excess of $100 from nonexempt functions file Form 100 and use the general corporation tax rate to compute the tax.

• These organizations do not pay the minimum franchise tax.
• Homeowners’ associations may also need to file Form 199 or FTB 199N.

Due Date

File Form 100 on or before the 15th day of the fourth month after the close of the organization’s tax year. For example, if the tax year ends on December 31, the return is due on April 15.

We impose the same types of penalties and interest on homeowners’ associations and political organizations as we impose on for-profit corporations.

Exception: We do not require political organizations to make estimate payments; therefore, we do not impose the estimate penalty on them.

Extension of time to file

An extension allows you more time to file the return, not an extension of time to pay any fees due.

We will grant an automatic six-month extension to file a return if both of the following conditions exist:

• Your organization is not suspended on the original due date.
• You file your organization’s return on or before the extended due date.

Group Exemption and Group Filing

Group Exemption

A parent, state, district, or like organization seeking state tax-exempt status for its California subordinates may file on their behalf, either one of the following:

• FTB 3500, Exemption Application.
• FTB 3500A, Submission of Exemption Request, if the entity obtained federal exemption under IRC Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19).

Before group exemption is submitted, the parent organization must first or simultaneously receive tax-exempt status.

For detailed instruction about group exemption, get FTB 3500 or FTB 3500A. Go to ftb.ca.gov/Forms and search for 3500.

Group Filing

A central parent, or like organization may file a group return on Form 199 for two or more subordinate organizations that:

• Are tax-exempt under a group exemption letter that is still in effect or obtained tax-exempt status on their own.
• Are affiliated with the central organization at the time its annual accounting period ends.
• Are subject to the central organization’s general supervision or control.
• Have the same tax year-end.

Exception: You cannot include private foundations in a group return.

For detailed instruction about group filing, get Form 199, California Exempt Organization Annual Information Return. Go to ftb.ca.gov/Forms and search for 199.

Every year, each local organization must authorize the central organization in writing to include it in the group return and must declare, under penalty of perjury, that the authorization and the information it submits to be included in the group return are true and complete.

Subordinate Organizations

If a subordinate organization earns gross unrelated business income of more than $1,000 for the year, the subordinate must file its own Form 109. We also require the subordinate to file its own Form 199 or FTB 199N. The parent cannot include the subordinate in the group return.

Consequences of Not Filing or Paying an Amount Due

Suspended/Forfeited

Once suspended, the corporation no longer has the protection of its corporate shield. That means, among other things:

• Its name is available to any other entity that wants to incorporate and use it.
• It cannot defend itself or file suit in court.
• The other party to the contract may void its contracts.
• We may revoke its tax-exempt status. Then the organization is subject to the franchise tax provisions – including the requirement to pay at least the minimum tax each year.

If the organization incorporated somewhere other than California, and qualified to do business in California through SOS, rather than being suspended, the organization’s status is “forfeited.” The consequences of forfeiture are basically the same as they are for a suspended corporation.

Remedies

The primary requirements for the organization to be reinstated to good standing are:

Jeopardizing Tax-Exempt Status

There are several reasons an organization’s tax-exempt status can be in jeopardy and revoked. The following are just some of the reasons an organization’s tax-exempt status may be revoked:

• FTB 199N required and not filed for 3 consecutive years.
• Organization is suspended.
• Unincorporated association or incorporated organization does not file a missing return or pay a balance due.
• Organization is inactive.
• Not filing with the Registry of Charitable Trusts if required.
• No longer organized or operated for an exempt purpose.

Dissolution

You can dissolve or surrender your nonprofit by one of the following options:

• If active (not suspended), go to the sos.ca.gov to find the business entity forms for Corporations – California (Domestic).
• If suspended or forfeited either:
  • File for voluntary dissolution.
  • Wait for administrative dissolution.

Voluntary Dissolution

To qualify for voluntary dissolution, you must have completely stopped doing business and you either:

• Have a prior IRS or FTB exemption.
• Have never done business in California.

How to Apply

To apply for voluntary dissolution, complete Form 3502, Nonprofit Corporation Request for Pre-Dissolution Tax Abatement. Go to ftb.ca.gov/Forms and search for 3502.

• After You Apply We will review your application and if approved, you will receive a letter with instructions to complete your dissolution process with SOS.
• We may contact you if we need additional information.
• If you do not qualify you will receive a letter with why you did not qualify for the voluntary dissolution.

If you are a Public Benefit Corporation:

• We will request a waiver from the Attorney General before we send you an approval letter.

• You must then complete the dissolution process with SOS.

Administrative Dissolution

We will administratively dissolve or surrender a corporation that:

• We suspended or forfeited for more than 48 continuous months.
• Has not filed returns for 4 or more years.

A notice of proposed dissolution will be sent to the last address reported to us.
If you disagree, you have 60 days from the date on your notice to send us a written objection letter.
If you agree or don’t respond, your nonprofit will be automatically dissolved.

Public Listings

We post a list of those organizations whose tax-exempt status was revoked. Go to ftb.ca.gov and search for revoked list.

For tax-exempt entities, go to ftb.ca.gov and search for entity status letter.

Tax-Exempt Sections

Registry of Charitable Trusts

The Registry of Charitable Trusts (within the California Department of Justice) ensures that charitable organizations use their funds and manage their assets properly.

The Registry of Charitable Trusts (Registry) requires registration within 30 days after receiving assets. To register, an organization submits Articles of Incorporation and bylaws and pays an initial registration fee. The fee applies to all charities registering with the Attorney General’s Registry of Charitable Trusts for the first time, regardless of gross revenue or assets.

Once registered, the organization annually files a report with the Registry. If the organization does not file, the Registry notifies our Exempt Organizations Unit. We will send a notice that the organization has 120 calendar days to comply with the Registry, or we will revoke the organizations tax-exempt status. FTB cannot give an extension to allow additional time to comply with the RCT requirements.

If the tax-exempt status is revoked, then you may reapply for tax-exempt status if you do the following:

• File a FTB 3500, Exemption Application
• Submit the documentation required in support of your application.
• Comply with all Registry filing requirements.

Bingo

Certain types of organizations qualify to conduct bingo games, if they meet the requirements set forth in the Revenue and Taxation Code Section 23710 that references California Penal Code Section 326.5.

The organization must meet the primary requirements listed as follows:

• Qualify as one of the following types of organizations:
  • A nonexempt senior citizens organization.
  • A nonexempt mobile home park association.
  • An organization exempt under one of the following California R&TC sections:
    • 23701a – labor, agricultural, or horticultural organization
    • 23701b – fraternal beneficiary societies, order or associations
    • 23701d – religious, charitable, scientific, testing for public safety, literary educational, amateur sports, or prevention of cruelty to children or animals organization
    • 23701e – business league chambers of commerce, real estate boards, and boards of trade
    • 23701f – civic leagues, social welfare organizations, and local employee organizations
    • 23701g – social club
    • 23701k – apostolic and religious organizations
    • 23701l – fraternal societies, orders, or associations
    • 23701w – veterans’ organizations
• Have a license to conduct bingo games.
• Use the funds for charitable purposes.
• Meet all requirements of the California Penal Code Section 326.5.

Oversight Responsibility

Various agencies get involved with some aspect of bingo gaming. Refer to the following list of contacts for more information:

• The local jurisdiction (city, county, or both):
  • Issues licenses to conduct bingo games.
  • Enforces the provision in their ordinances and the penal code.
  • Revokes licenses when facts and circumstances warrant.
• The Registry of Charitable Trusts ensures that the organization uses the funds for charitable purposes.

Raffles

Certain types of organizations qualify to conduct raffles, if they meet the requirement under California Penal Code Section 320.5.

The organization must meet primary requirements listed as follows:

• Registered with the Registry of Charitable Trusts and file annual reports.
• Exempt under one of the following California R&TC sections:
  • 23701a – labor, agricultural, or horticultural organizations
  • 23701b – fraternal beneficiary societies, order, or associations
  • 23701d – religious, charitable, scientific, testing for public safety, literary educational, amateur sports, or prevention of cruelty to children or animals organization
  • 23701e – business leagues, chambers of commerce, real estate boards, and boards of trade
  • 23701f – civic leagues, social welfare organizations, and local employee organizations
  • 23701g – social clubs
  • 23701k – apostolic and religious organizations
  • 23701l – fraternal societies, orders, or associations
  • 23701t – homeowners’ associations
  • 23701w – veterans’ organizations
• Submit to the Registry of Charitable Trusts an annual registration form (CT-NRP-1), including the raffle fee for each year the organization plans to conduct a raffle and receive a written confirmation before holding a raffle.
• File a report with the Registry for each raffle conducted.
• Use at least 90 percent of the gross receipts for charitable or public benefit purposes.

The Registry of Charitable Trusts administers the raffle law. Contact their office if you have questions about registration, reporting, or specific requirements for conducting a raffle.

Web

oag.ca.gov/Charities

Phone

916-210-6400

Mail

Registry of Charitable Trusts
Office of the Attorney General
PO Box 903447
Sacramento CA 94203-4770

Connect With Us

Web

ftb.ca.gov and search for charities

Phone

916-845-4171 from 7 AM to 4:30 PM weekdays, except state holidays.

Fax

916-855-8090

Your Rights as a Taxpayer

Our goal is to make certain we protect your rights. We want you to have the highest confidence in the integrity, efficiency, and fairness of our state tax system. FTB 4058, California Taxpayers’ Bill of Rights, includes information on state taxpayers’ rights and how to request written tax advice from us.

In keeping with the California Taxpayers’ Bill of Rights, taxpayers who have been unable to resolve their problems with us through regular channels may contact our Taxpayers’ Rights Advocate. Go to ftb.ca.gov and search for problem.

Forms and Publications on the Web

Request Forms by Telephone

Telephone

Phone: 800-338-0505

When prompted, select business entity information, then select forms and publications and enter the code for the form you need. (For prior year forms, call 800-852-5711. Allow two weeks to receive your order.

Request Forms by Mail

Mail

Tax Forms Request Unit
Franchise Tax Board
PO Box 307
Rancho Cordova CA 95741-0307

Assistance: Other Governmental Agencies

For more information about nontax issues, refer to the following list of contacts: