taxes

501(c)(2), (5), (6), (7), (16) or (25)

A 501(c)'s exemption from certain state taxes is based largely on an organization's affiliation with its parent entity, assuming that

  • The organization is a recognized subordinate under the parent organization's group exemption
  • The parent organization's group exemption meets the exemption requirements from one or more of these state taxes
  • The parent organization's group exemption has been established on the Comptroller's records

What kind of exemption is my 501(c) organization eligible for?

The following organizations are exempt from franchise tax only:

  • Nonprofit corporations with an exemption from IRS under IRC Section 501(c)(5), (6) or (7)
  • Corporations (profit and nonprofit) with an exemption from IRS under IRC Section 501(c)(2), (16) or (25)

A federal tax exemption only applies to the specific organization to which it is granted. Note that when an organization changes its structure, it effectively creates a new organization and must reapply for both federal and state tax exemption.

For example, assume that the Acme Foundation, an unincorporated organization, is granted a federal tax exemption. The foundation then incorporates in the name of Acme Foundation Inc. The federal exemption granted to Acme Foundation, the unincorporated entity, does not extend to the new corporate entity Acme Foundation Inc.

A qualifying 501(c) must apply for state tax exemption.

How do we apply for an exemption?

To apply for franchise tax exemption based on the federal exempt status, complete and submit Form AP-204, Texas Application for Exemption – Federal and All Others (PDF). Include a copy of the IRS-issued exemption determination letter with any addenda. The organization name on the IRS letter must match the organization's legal name as listed in the Articles of Incorporation, Certificate of Formation or governing document. If the IRS letter was issued more than four years ago, you will need to obtain a current verification letter. Send us a copy along with a copy of the original determination letter that granted the exempt status.

Note: 501(c)(2) or (25) organizations must also provide a statement showing the organization for which the corporation holds title to property. The corporation must also show that the organization for which it holds title for property is either exempt from, or not subject to, the Texas franchise tax. To do this, include with the application a copy of the formation or governing document and a list of all the activities of the organization for which it holds title.

To apply for federal exemption or to obtain a current verification letter, contact the IRS at 1-877-829-5500 or visit the IRS Web site.

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