The obvious benefit of 501(c)(3) status is being exempt from paying federal income tax. Also, some states automatically grant state income tax exemption to 501(c)(3) nonprofits. Another advantage is that individuals’ and businesses’ contributions to the nonprofit are tax deductible, which incentivizes people to donate to the organization. 501(c)(3) status also allows a nonprofit to seek funding via grants from foundations and government agencies.
Qualification Requirements for 501(c)(3) Status
Not all nonprofits can be Section 501(c)(3) organizations. Here are the IRS’s qualification requirements:
- Must be organized and operated solely for specific tax-exempt purposes.
- None of their earnings may benefit any private shareholder or individual.
- No substantial part of their activities can attempt to influence legislation.
- It should not participate in or intervene in any political campaigns in support of or in opposition to candidates for public office.
501(c)(3) exempt purposes:
- Charitable (e.g., relief of the poor, distressed, or underprivileged)
- Testing for public safety
- Fostering national or international amateur sports competition
- Preventing cruelty to children or animals
Some nonprofit organizations are considered tax-exempt under the 501(c)(3) tax code and, therefore, do not have to file with the IRS to obtain recognition of exemption. Examples include churches, mosques, synagogues, auxiliaries and associations of churches, and organizations with gross receipts of $5,000 or less in the tax year.
Nonprofits that don’t fit the criteria for being a 501(c)(3) might still qualify for tax-exempt status. Typically, they must file IRS Form 1024 to apply for tax exemption.
Submitting Form 1023 to the IRS
Form 1023 must be filed electronically:
- Register for an account on Pay.gov.
- Enter “1023” in the search box and select Form 1023.
- Complete the form.
It seems simple enough, but the simplicity stops there! Form 1023 has 26 pages and requests a lot of detailed information. The IRS takes compliance very seriously when considering whether to grant 501(c)(3) status. Expect to receive questions from the IRS about the application and anticipate that it may take three months to a year for the IRS to return its decision (via a determination letter).
Each time organizers submit Form 1023 to the IRS, they must pay $600 for the filing. Make sure you have all the required information and have completed the form completely before submitting the application, or it will cost you!
Note that some nonprofits might qualify to file a shorter (and lower-cost, $275) version of the form — Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. To find out if your organization is eligible, complete the Form 1023-EZ Eligibility Worksheet found in the IRS’s instructions for Form 1023-EZ.
Information and documentation needed for submitting Form 1023:
In preparation for completing the form, the nonprofit must have an EIN, and applicants must create and upload a single PDF file (not exceeding 15MB) that contains a copy of each of the following items:
- Entity formation document and any amendments (e.g., articles of incorporation, constitution, trust document, etc.)
- Bylaws, if adopted
- Signed & completed Form 2848 (Power of Attorney and Declaration of Representative) if a third party will represent the organization
- Form 8821(Tax Information Authorization) if the organization will authorize a third party to receive its confidential tax information
- Supplemental responses, if applicable
- Expedited handling request, if applicable
Carefully read the form’s instructions so that you assemble the documentation in the correct order.
The 26-page Form is broken down into 11 parts to be completed by all applicants, followed by schedules for specific types of organizations:
- Part I: Identification of Applicant (organization name, address, contact, etc.)
- Part II: Organizational Structure (entity type, bylaws)
- Part III: Required Provisions in Your Organizing Document (questions to assess if formation documents contain the required provisions for meeting 501(c)(3) criteria)
- Part IV: Narrative Description of Your Activities (describing the nonprofit’s past, present, and planned activities)
- Part V: Compensation and Other Financial Arrangements With Your Officers, Directors, Trustees, Employees, and Independent Contractors (annual compensation, if applicable, for services to the organization; questions related to compensation arrangements)
- Part VI: Your Members and Other Individuals and Organizations That Receive Benefits From You (questions related to goods, services, and funds provided by the nonprofit to individuals and other organizations)
- Part VII: Your History (questions related to the organization’s history, including whether it’s taking over activities of another organization)
- Part VIII: Your Specific Activities (information about the types of activities the nonprofit will participate in — e.g., types of fundraising activities, political involvement, types of contributions accepted, awarding of grants or loans, etc.)
- Part IX: Financial Data (Statement of Revenues and Expenses and Balance Sheet)
- Part X: Public Charity Status (questions to determine classification as either a private foundation or public charity)
- Part XI: User Fee Information and Signature
- Schedule A: Churches (questions specifically for religious organizations)
- Schedule B: Schools, Colleges, and Universities (questions about operations and racial nondiscrimination policy)
- Schedule C: Hospitals and Medical Research Organizations (questions for healthcare-related nonprofits)
- Schedule D: Section 509(a)(3) Supporting Organizations (questions about the nonprofit’s relationship with organizations it supports)
- Schedule E: Organizations Not Filing Form 1023 Within 27 Months of Formation (questions and information to determine the date of eligibility for tax exemption)
- Schedule F: Homes for the Elderly or Handicapped and Low-Income Housing (questions for nonprofits that provide housing for those in need)
- Schedule G: Successors to Other Organizations (questions for a nonprofit taking over activities or assets of a for-profit organization or converting from a for-profit to a nonprofit organization)
- Schedule H: Organizations Providing Scholarships, Fellowships, Educational Loans, or Other Educational Grants to Individuals and Private Foundations Requesting Advance Approval of Individual Grant Procedures (questions about the types of educational grants, loan terms, purpose, application process and criteria, etc.)
You can find more information about the various sections of Form 1023 in the detailed instructions on the IRS website.
Where to Get Help
I recommend discussing the legal and financial considerations of forming a nonprofit organization with a business attorney and CPA. When applying for 501(c)(3) status, a CPA’s input on the financial sections can also be beneficial. Also, to save valuable time and have the peace of mind that your federal and state income tax exemption applications are completed fully and accurately, ask my expert business filings team to prepare and submit the forms for you.
Get YourNonprofit Off the Ground With CorpNet!
CorpNet’s team of business filing experts is here to help you prepare and submit your critical nonprofit business registration and tax exemption filings. We’ll also help keep you in compliance as your nonprofit grows and flourishes.