Does it make sense to apply?
The Farmers Market Coalition (FMC) has prepared an overview about applying for 501(c)3 or another tax exempt status. This should be read prior to making a decision as to whether this is right for your market organization.
Does the market’s mission fit the tax exempt requirements?
Although there are benefits to applying for tax exempt status as a nonprofit, there are also costs. For example, to take full advantage of the tax exempt status, you will have to demonstrate to the IRS that the market organization has a strong education and service mission with regular programs and activities. They need to see evidence that your market is more than a location for vendors to show up and sell each week.
How is the market organized?
How a market is organized can influence which tax exempt status makes the most sense. If the market is a vendor membership organization and prioritizes sales to vendors, it may make more sense to submit an application for the 501(c)6 status.
The most notable reason markets apply for the 501(c)3 tax exempt status is to be eligible to receive tax deductible charitable contributions. This opens up funding opportunities from private foundations, individuals or grantors that require the recipient to be a 501(c)3. There are other good reasons to do this: favorable IRS tax treatment so that most revenue the market receives as part of its normal programming is not taxed and general community recognition that the market is serving a valued public benefit rather than just benefiting specific individuals.
On the other hand, the 501(c)3 organizations can be subject to more public scrutiny; tax forms are expected to be sent to the Secretary of State for posting on its website for review by potential donors. Funders may have special reporting requirements. The IRS tax Form 990 requires income and expenses to be categorized differently than for regular businesses, so there is a learning curve to do this correctly. This can impact the market’s bookkeeping and accounting systems. There are a few different 990 forms, of which your accountant can help you file annually.
Are the board and market leaders willing to commit to the process?
Making the decision to apply for recognition by the IRS as a nonprofit with tax exempt status is a time consuming and complicated process that will require many dedicated hours by a market champion to coordinate the effort and ensure the application is completed. It will require support from the Board of Directors, and most likely, legal assistance.
Does our market need to be a 501(c)(3) to have a sponsorship program?
No! Any market can have a sponsorship program. Some businesses will only sponsor 501(c)3s but others are happy to support your market. If you provide publicity for the sponsor, such as name and logo on a banner or on your website or poster, a sponsor can claim their donation as a marketing expense.
Applying for Federal Nonprofit Status
If your market decides to apply, what do you need to do? The standard application (Form 1023) is 29 pages and includes numerous schedules and attachments. In 2014, the IRS created a new Form 1023 EZ for very small nonprofits (three pages) that have gross receipts less than $50,000 and assets valued at less than $250,000. We are not aware of any farmers markets that have used this form to apply.
In the State of Hawaii, farmers markets have needed to use the services of an attorney to submit a successful application. Prior to starting the application, gather all the necessary materials.
Articles of Incorporation and By-laws. The IRS looks to these two documents to ensure that your market organization’s mission and organizational structure meet the requirements for tax exempt status. If not, they must be amended and approved by the Board of Directors, and filed with the Secretary of State, prior to submitting the Form 1023. Although this sounds daunting, this is common and many markets have had to go through this process.
The IRS wants to see that your market is organized and operated for religious, charitable, scientific, public safety, literary or educational purposes. The IRS also wants to make sure the Articles stipulate that upon dissolution, the organization’s assets will be distributed to worthy organizations, not to benefit the board, officers, or members.
Conflict of Interest Policy. The IRS requires all 501(c)3 organizations to have a Conflict of Interest policy that each board member must sign every year. This is to ensure that individual board members and officers are not receiving special treatment or financial benefit from their role in the organization. The Hawaii Farm Bureau Federation (HFBF) has a sample conflict of interest policy available.
Financial Statements and budgets. The Form 1023 requires several years of financials and pro forma budgets to show how the funds have been, and are projected, to be spent.
Filing fee. If your market’s gross revenues (not vendor sales) average greater than $10,000, the cost is $850 (smaller organizations pay $400). If your market applies using Form 1023EZ, the fee is $275.
Documentation of the market’s activities that demonstrate how they fulfill the expectations of tax exempt status. This can include flyers, newsletters, educational materials you create for various activities such as cooking demos, kids educational activities, or food access programs.
In addition, although not required, farmers markets in the State of Hawaii and around the country usually need the services of an attorney to file a successful application. Fortunately in Hawaii, we have the Legal Aid Society of Hawaii, a nonprofit that can help you find an attorney who will offer pro bono services to prepare the application. Your market can save time and effort by finding an attorney at the beginning of the process.
The best time to apply for 501(c) status is when first opening the market. However, a market can apply at any time. The IRS recommends applying within the first 15 months of operation. After that time, you will need to submit additional justification explaining why the market did not apply in a timely manner and why it should now be considered for review.
If our market obtained 501(c)(3) status from the IRS, do we also have to apply separately with the Hawai’i Dept. of Taxation to gain income tax exempt status in Hawai’i?
The answer is no! If your market is exempt from federal income tax the Hawai’i Department of Taxation will automatically exempt your market from Hawaii income tax. However, you may want to apply for the GET (General Excise Tax) exemption, which comes with different benefits.
Regardless of whether your market is a 501(c) or not, it will generally be taxed like any other business. The market will need to pay business and occupation (B&O) taxes on eligible revenues, sales tax from selling taxable items (like market merchandise) and sales tax on goods and services the market purchases (like office supplies). The Department of Taxation has helpful resources on their website.
Who qualifies for the GET exemption?
Organizations that qualify for the GET exemption are as follows:
- Fraternal benefit societies, orders, or associations;
- Corporations, associations, trusts, or societies organized and operated exclusively for religious, charitable, scientific, or educational purposes, as well as that of operating senior citizens housing facilities and that of operating or managing a homeless facility, or any other program for the homeless;
- Business leagues, chambers of commerce, boards of trades, civic leagues, agricultural and horticultural organizations, and organizations operated exclusively for the benefit of the community and for the promotion of social welfare and from which no promit inures to the benefit of any private stockholder or individual;
- Hospitals, infirmaries, and sanitarias.
Farmers markets would usually fall under the second or third listing as “. . . associations, trusts, or societies organized and operated exclusively for religious, charitable, scientific, or educational purposes” and “. . . agricultural and horticultural organizations, and organizations operated exclusively for the benefit of the community and for the promotion of social welfare and from which no promit inures to the benefit of any private stockholder or individual.”
How do I apply for the GET exemption?
The form to apply for the GET exemption, form G-6, can only be filed electronically through an account at Hawaii Tax Online (HTO). You can obtain an active account depending on your organization’s GET account status.
My organization does not have an HTO logon or an active GE account.
- From the HTO Home page, select Register New Business License
- Under BB-1 Basic Business Application, select Apply for Non-Profit Status
- Complete the application, attach required documents, make payment, and Submit
My organization has an HTO logon but does not have an active GE account.
- Log on to Hawaii Tax Online
- From the Home page’s “I Want To” section, select More
- Under Registration, select Apply for Non-Profit Status
- Complete the application, attach required documents, make payment, and Submit
My organization has an HTO logon and an active GE account.
- Log on to Hawaii Tax Online
- From the Home page select the active General Excise (G-45) account that will be applying for exemption status
- At the “I Want To” section, select Apply for Non-Profit Status
- Complete the application, attach required documents, and Submit
For more specific instructions to complete the application itself, read under INSTRUCTIONS FOR APPLYING FOR EXEMPTION ON HTO here.
When will the GET exemption be in effect?
If your market is based in Hawaii and you file your application within three months from the date you were legally formed and your application is approved, then your exemption will be effective on the date you were legally formed.
If I become a non-profit farmer’s market, is there anything else I should know taxation-wise?
Yes. All charitable organizations that solicit contributions from the public are required to register with the Hawaii State Dept. of the Attorney General’s Tax and Charities Division. Visit this page to register online or click on “Learn More” for further information.
More Good Resources
IRS Forms
Hawaii Department of Taxation Forms/Links