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California tax-exempt process streamlined

Passage of Assembly Bill (AB) 897 affects organizations that have obtained federal exemption under Internal Revenue Code (IRC) Section 501(c)(3). This new law is effective January 1, 2008, and should expedite the process for many organizations seeking California tax-exempt status.

Organizations that possess a federal determination letter under IRC 501(c)(3) can request California affirmation of tax exemption from us (under California Revenue & Taxation Code (R&TC) Section 23701d) by sending us a copy of the federal exemption. AB 897 only applies to organizations that have obtained their federal exemption letter under IRC Section 501(c)(3). It does not release organizations from fulfilling California's exemption law requirements. Organizations that do not fulfill California's requirements, will not receive affirmation of federal tax-exemption.

We created Form 3500A (Affirmation of Internal Revenue Code 501(c)(3)) for organizations affected by this bill. Those seeking state tax-exempt status based on their federal tax-exempt status will complete this new form, and attach it as a cover sheet along with all the pages of the federal determination letter.

This new law does not change any of California's filing requirements for FTB Form 199, California Exempt Organization Annual Information Return; FTB Form 109, California Exempt Organization Business Income Tax Return; or FTB Form 100, Corporation Tax Return.

Frequently Asked Questions

Check out our FAQs for answers to questions you may have about this new law:

My organization has a federal exemption under IRC Section 501(c)(3). What do I need to do to get California state tax exemption?

If your organization has already received a determination letter from the IRS granting exemption under IRC Section 501(c)(3), you may request California affirmation of federal exemption by filing form FTB 3500A, Affirmation of Internal Revenue Code Section 501(c)(3) with the federal determination letter attached. You are not required to submit the application fee of $25.

    • Download FTB 3500A from our Forms and Publications page.
    • Submit the Affirmation request at least 90 days before the date your organization needs exempt status so we will have adequate time to process your request.

Does it matter if the effective date of my federal tax-exempt status is different from my organization’s incorporation date?

Yes. For state income tax purposes, the effective date of an organization's tax-exempt status shall be no later than the federal effective date. Organizations whose federal effective date differs from their date of incorporation date, should consider filing form FTB 3500, Exemption Application.

Example

  • ABC organization incorporated on 12/31/1999. 
  • Federal effective date 12/31/2002. 
  • ABC organization filed form 3500A.

The state's effective date for ABC organization is 12/31/2002.  In order for ABC organization to avoid the minimum franchise tax or annual tax, ABC organization must file form FTB 3500, Exemption Application to request retroactive to 12/31/1999.

How are limited liability companies (LLCs) affected by AB 897?

California does not allow tax-exemption for single member LLCs under R&TC Section 23701d.  LLCs must elect to be treated as a corporation to be able to be granted exemption under R&TC Section 23701d.

When will my organization be considered to have exempt status?

You cannot consider your organization exempt for tax purposes until we have issued the affirmation of federal exemption letter.

All corporations and unincorporated associations, even if organized on a nonprofit basis, are subject to California franchise or income tax. Trusts organized and operated for purposes described in R&TC Section 23701d are treated as nonprofit corporations for exemption purposes.

My organization does not have federal exemption (or is exempt under a different Internal Revenue Code section). How do I obtain tax-exempt status for California?

If your organization does not have federal exemption, or is exempt under a different IRC section, you may request California franchise or income tax exemption by filing an Exemption Application form FTB 3500.

To obtain exemption from California franchise or income tax for your organization, you must send us an Exemption Application form (FTB 3500), a $25 check for the application fee, and all required documents.

  • Download FTB 3500 from our Forms and Publications page.
  • Submit the Exemption Application request at least 90 days before the date your organization needs exempt status so we will have adequate time to process your request

We must issue a determination of exemption letter.

When will my organization be considered to have exempt status?

You cannot consider your organization exempt for tax purposes until we have issued the determination letter. Trusts must include a copy of the federal determination letter before state exemption will be granted.

Can an inactive organization obtain tax-exempt status?

No. An inactive organization is not entitled to exemption. Organizations seeking to obtain and retain exempt status must meet requirements that they are organized and operating for nonprofit purposes within the provisions of their exempt code section.