What does being a 501c3, tax-exempt organization mean?
(Tax-exempt status is defined in section 501c3 of the IRS Tax Code.) The term "tax-exempt," when used in reference to nonprofit organizations, generally refers to the net profits (proceeds over and above expenses) of an organization being exempt from federal and/or state income tax. While a nonprofit organization can be established by incorporating, the entity is not automatically tax-exempt upon creation with the state. Tax-exemption can usually be achieved only through applying for and receiving Internal Revenue Service (IRS) approval.
Is there more than one category of tax-exempt organization?
Yes. The one most familiar (and addressed in subsequent questions below) is the Internal Revenue Code (IRC) Section 501c3 public charity or private foundation, which is established for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children. There are also IRC Section 501(c)4 through 501(c)27 organizations that are considered tax-exempt, but not charitable. Examples include trade associations, social clubs and certain advocacy organizations involved in substantial political lobbying activity.
What benefit does being 501c3 offer my nonprofit and its contributors?
One of the primary benefits of being considered tax-exempt under IRC Section 501(c)(3) is the ability to accept contributions and donations that are tax-deductible to the donor. Additional benefits include, but are not limited to: Exemption from federal and/or state corporate income taxes Possible exemption from state sales and property taxes (varies by state) Ability to apply for grants and other public or private allocations available only to IRS-recognized, 501c3 organizations Potentially higher thresholds before incurring federal and/or state unemployment tax liabilities The public legitimacy of IRS recognition Discounts on US Postal bulk-mail rates and other services
What form is required for 501c3 status?
To apply for IRS 501c3 recognition, IRS Form 1023 must be completed and filed.
With whom is Form 1023 filed?
Form 1023 is filed with the Cincinnati Service Center of the Internal Revenue Service.
What are the fees to file Form 1023?
The IRS has a two-tiered filing fee structure. The IRS filing fee depends on your NPO's projected annual revenues (cash and in-kind). The re-instatement filing fee may be different.
Is there a state application as well as federal?
In most states, it is not necessary to apply to the state. While a handful of states have a simple, one- or two-page form that must be prepared, California is the only state that requires a separate application process rivaling the one required by the IRS. In California, federal tax-exemption does not eliminate state income tax liability until approval is received from the California Franchise Tax Board. We can assist with the California filing.
How long does it take to complete Form 1023?
IRS Form 1023 is 28-pages long, plus required schedules and attachments. While every organization does not have to complete every page, a typical application package is between 25-75 pages of material. More important, however, is the amount of time required to complete the package. The IRS estimates a preparation time of well over 100 hours for a novice to prepare Form 1023. Non-Profit Filing.Com completes Form 1023 on behalf of its clients.
How long does it take for the IRS to approve 501c3 status?
Typically, IRS 501c3 approval takes between 4 and 6 months, plus likely written follow-up questions. Sometimes it takes a little less; sometimes a little more.
What happens if the application is rejected?
A negative 501c3 determination by the IRS can be appealed. Alternatively, the organization may choose to apply again from scratch. In either case, it is usually an uphill battle to acquire 501c3 recognition once an organization's initial application has been rejected.
Can anyone complete Form 1023?
Technically, anyone can complete Form 1023. From a practical standpoint, it is advisable to enlist the help of a professional who specializes in the process, such as Non-Profit Filing While the IRS rejects slightly less than 10% of applications filed, more than one-third are abandoned by the filer...usually out of frustration or inability to answer the IRS follow-up questions. Out of approximately 80,000 applications filed annually, nearly half never make it through the process. This is why having a professional team like Non-Profit.Com support your efforts is important for your success.
Will my personal tax or financial situation affect my nonprofit receiving 501c3 status?
No. There is no direct correlation between the organization and the financial, tax or credit status of any officer, director or employee.
What information will be required on Form 1023?
In order for the IRS to make a determination, specific questions must be answered relative to the organization's legal structure, its governing board and potential conflicts of interest. More importantly, pages of detailed questions concerning the organization's activities must be answered. This is in addition to a two-year budget (new organizations) or three years of financial history (existing organizations) and a written narrative essay outlining the organization's programs, both current and planned that will advance the organization's exempt purpose. Add to that copies of supporting schedules and documentation and you have a basic application package.
When does Form 1023 need to be filed?
Generally, Form 1023 should be filed within 15 months of the organization's formation. For practical reasons, many organizations find it better to apply as soon as possible following formation. Extensions beyond 15 months may be possible under a variety of circumstances.
Does Form 1023 need to be notarized?
Form 1023 requires the signature of an officer of the organization, but it does not need to be notarized.
Can Form 1023 be filed online?
Form 1023 cannot be filed online.
Can I file Form 1023 before having the Articles of Incorporation for my nonprofit?
Yes, but it is generally not recommended. The IRS will allow unincorporated associations to apply, but these organizations will not have the inherent benefits associated with the corporate structure. In addition, the IRS will still require copies of an organizing document.
Can I start receiving contributions before Form 1023 is approved?
Generally, yes. The IRS 501c3 recognition is usually retroactively effective to the earlier of: 1) the organization's legal formation or 2) the commencement of its programs. This means that the organization's activities are retroactively tax-exempt and donations are retroactively tax-deductible to the donor, extending even to prior tax years. Under certain circumstances, IRS tax-exemption may only be retroactive to the date of the filing of Form 1023.
Can I apply for grants before Form 1023 is approved?
Technically, yes, but most foundations, government agencies and other funders will require an organization to possess an approved IRS 501c3 determination letter.
If my nonprofit is tax-exempt, do I pay any type of taxes?
Possibly. Private foundations may still be subject to taxes on investment earnings and undistributed minimum grant allocations. All 501c3 organizations may be subject to taxes on "unrelated business income." 501c3 organizations that have employees are generally subject to federal and state employment taxes. Additionally, some states do not exempt 501c3 organizations from sales and/or property taxes. It is important for the organization to know what is required in its state and locality.
Will my nonprofit be given a 501c3 number separate from its EIN?
No. Your EIN is the only number federally associated with your organization. If you apply for and receive sales tax-exemption in your state (if available), you may have a number issued by that state agency that is different from your EIN.
Once my nonprofit has been granted 501c3 status, what needs to be done to maintain that status?
At a minimum, the organization must continue to operate for the purposes for which it received tax exemption. In addition, certain federal and state compliance filings may be required. For example, accurate accounting practices must be maintained. All financial records are subject to public and federal review. Your organization must have annual reports, and minutes of their Board of Directors. IRS tax return must be filed each year at the end of your non-profits fiscal year. Non-Profit Service can help you with all of these functions if you need additional support.