Starting or running a nonprofit is one of the most rewarding things a person can do. You identified a need in your community, rallied people around a shared purpose, and built something that gives back in a real and lasting way. Behind all of that passion is a financial structure that makes it possible: your tax-exempt status. Keeping that structure in good standing takes ongoing attention, and a new Colorado law is giving charitable organizations one more tool to do just that.
Governor Jared Polis signed Senate Bill 26-009 into law, a measure that affects how Colorado determines a nonprofit state tax exemption status. This nonprofit tax news is worth understanding, and at MBE CPAs, we want to walk you through what it means and what your organization should be aware of going forward.
What Is a 501(c)(3) and Why Does It Matter?
A 501(c)(3) is a federal tax designation issued by the Internal Revenue Service that officially recognizes an organization as a tax-exempt charity. This designation does two important things: it allows the organization to operate without paying federal income tax on most of its revenues, and it allows donors to deduct their contributions on their federal tax returns.
For Colorado nonprofits, that federal designation has historically been tied to state-level tax benefits as well. Many categories of Colorado tax-exempt status, including sales and use tax, have been linked to whether an organization held an active 501(c)(3) designation. That relationship between state and federal status is what Senate Bill 26-009 addresses.
What Is Senate Bill 26-009, and What Changed?
Senate Bill 26-009, also referred to as SB 26-009, is a Colorado law that adjusts how the state determines nonprofit tax-exempt status. Previously, Colorado’s charitable organization definition for sales and use tax purposes mirrored the federal 501(c)(3) criteria. If an organization’s federal status changed, its state exemption could follow.
Under SB 26-009, Colorado now presumes that an organization qualifies as a charitable organization for state sales and use tax purposes if it can present an IRS determination letter, past or present, confirming its 501(c)(3) status. As Representative McCluskie noted during the bill’s passage, “this bill ensures that they will continue to qualify for sales tax and use tax exemptions.”
For context, Colorado’s nonprofit sector includes more than 16,000 organizations that generate approximately $62 billion in annual economic activity and support more than 262,000 jobs statewide.
What Does This Law Actually Do for Your Organization?
Here is the practical breakdown of what SB 26-009 changes:
- Your IRS determination letter now carries more weight at the state level. The Colorado Department of Revenue is required to treat any organization that presents a 501(c)(3) determination letter, current or former, as a qualifying charitable organization for state sales and use tax purposes.
- A shift in federal status does not automatically affect your state exemption. Colorado will not presume that an organization has lost its state tax-exempt standing solely because its federal status has changed.
- Colorado retains its review authority. The state can still review and deny tax exemptions for organizations that have lost their federal designation due to fraud or misuse of funds. SB 26-009 does not remove that oversight.
- The scope is specific. This law addresses state sales and use tax exemptions. Other tax categories at the state and federal levels are not covered by this change.
What Should Your Organization Know Right Now?
Understanding the law is one thing; making sure your organization is positioned well under it is another. Here is what every nonprofit leader should keep in mind:
- Locate and safeguard your IRS determination letter. This document is now central to maintaining your state tax-exempt standing. Make sure your executive director, board chair, treasurer, and any other key leadership have access to it or know exactly where it is kept.
- Keep your financials accurate and well-documented. Colorado’s authority to review and deny exemptions for organizations that have run into issues such as fraud or financial mismanagement has not changed. Your records should always reflect an honest and complete picture of how your organization operates.
- Understand your full tax picture. SB 26-009 covers state sales and use tax, but your organization carries other tax obligations at both the state and federal levels. Having a complete view of all of them matters for your long-term health.
- Confirm your status with the Department of Revenue. Colorado 501(c)(3) requirements include organizations to define themselves as charitable organizations and to validate that status with the Department of Revenue. Keeping your registration current is a simple but important step.
- Know where you stand with your audit. If your organization is required to have an annual audit or is approaching the threshold where one becomes necessary, this is a good time to assess your readiness. A well-prepared audit gives your leadership, board, and funders confidence in your organization’s financial direction, not just its current standing.
How Does This Affect the People Your Organization Serves?
Nonprofit financial health and community health are closely connected. The work charitable organizations do across Colorado, from food assistance and affordable housing to education and family services, depends on the financial stability of the organizations providing it. When a nonprofit faces a disruption in its tax status, leadership’s attention and resources shift toward resolving the issue, away from the people the organization was built to serve.
Awareness of laws like SB 26-009 helps nonprofit leaders stay informed about the protections available to them, so they can keep their focus on their mission.
Is Your Organization Ready for What an Audit Requires?
Laws and exemptions can change, but one constant for nonprofits is the importance of having clean, well-organized financials. A nonprofit audit is one of the most valuable ways to demonstrate that your organization is operating with integrity, and in many cases, it is required for grant eligibility, government funding, or board governance standards.
At MBE CPAs, nonprofit audits are a core part of our work. We work alongside organizations at every stage to make sure the audit process is clear and straightforward, your financial statements accurately reflect your organization’s activities, and your leadership and board have the information they need to make confident decisions. A strong audit record also builds the kind of credibility with donors and funders that carries a nonprofit forward for years.
If you have questions about audit requirements or want to understand the process for your organization, connect with a tax professional who understands the nonprofit space. Your community is counting on the work you do, and we are here to help make sure the financial side supports it.