A determination letter is a document that outlines an American organisation’s tax-exempt status. It is an important document issued by the Inland Revenue Service (IRS) that should be obtained by non-profits and other charitable organisations to prove their tax exemption status.
In the UK, the HM Revenue and Customs or the Charities Commission provide the necessary documentation for approved non-profits, opening the door to tax savings, grants and other benefits.
Purpose of a determination letter
A determination letter allows non-profits to function at maximum capacity. Here are the primary purposes of this vital document:
- Provides legitimacy
A determination letter lends legitimacy to an organisation’s mission and establishes trust among donors regarding their investments.
- Helps acquire tax savings
Without this letter, a non-profit would have to pay full federal income tax. It helps them utilise higher proportions of donations to aid their mission.
- Serves as evidence for grant applications
A determination letter gives you an official tax-exempt status and allows your organisation to apply for a variety of grants. For most, this document serves as a basic eligibility criterion.
- Allows donors to claim tax relief
This distinction allows non-profits to offer tax write-offs to their donors. Once the letter is received, all donors can declare their contributions on their annual tax returns.
- Gain discounts on some services
Many corporations offer discounts to charitable organisations with an official status, including technology and software products, professional memberships and more.
General contents of a determination letter
These are the contents of a standard determination letter:
- Organisation name
Your organisation’s unique name, which cannot be the same as another registered charity, is highlighted in the top section.
- Tax identification number
Even though achieving this status will exempt an organisation from taxes, having an independent tax identification number is necessary.
- Effective date of tax-exempt status
The letter mentions the date when the organisation’s exempt status will officially take effect.
- Any conditions or restrictions
There are certain limitations imposed on organisations seeking tax exemption. The letter includes all the necessary conditions an organisation must meet to achieve and maintain its tax-exempt status.
Key steps to achieving a determination letter
Sort out the following important details to receive a determination letter:
- Choose a unique, appropriate name for your non-profit.
- Register your organisation to establish its official founding.
- Appoint dedicated individuals to form a board of directors.
- Prepare your organisation’s byelaws and official documents.
- Acquire a tax identification number.
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