What does being a 501c3, tax-exempt organization mean?
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 501(c)(3) 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, 501(c)(3) 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 501(c)(3) 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 is a nonprofit organization?
According to the IRS
codes, 501(c)(3) tax exemption means being exempt
from paying federal income taxes for charitable,
religious, scientific, literary and education
organizations.
If I filed my incorporation with
my state do I also need to file for 501(c)(3) tax
exemption?
Yes, filing your
incorporation is recognized by your state and filing
for tax exemption status is granted at the federal
level by the IRS. You must complete a separate
application, form 1023 to file for 501(c)(3) tax
exemption.
What is required for the IRS to
grant 501(c)(3) tax exemption?
The main two key
requirements for tax exemption is that it the
nonprofit must be organized and operated exclusively
for one or more exempt purposes. Organization means
it must be organized as a corporation, limited
liability company, trust, or an unincorporated
association. Operating means the organization must
be operated to further the exempt purpose stated in
its organizing documents.
How long does it take for the IRS
to approve 501c3 status?
The IRS 501(c)(3) tax
exemption usually takes 3-6 months for approval.
This time is based on the initial information
provided to the IRS and the responses to the IRS
inquiries. Organizations that are created to give
immediate help for disaster relief or awaiting
approval for a grant that has a defined expiration
date can ask for an expedited review. There is no
guarantee that you will be given an expedited
review.
What information will be required
on Form 1023?
The form 1023 application
is a 28 page application that helps the IRS to grant
you tax exemption. The IRS request your Bylaws,
Conflict of Interest Policy, Certificate of
Organization, Assigned Tax ID number, Financials
Projections*, Explanation of programs and services
both current and projected.
* Financial Projections:
Organizations
existing more than 4 years or more:
You must provide income and expenses for the current
year and the 3 years prior to the current year. This
is a total of 4 years of financial information.
Organizations
existing more than 1 year, less than 4 years:
You must provide income and expenses for any year
completed and 2 years of projected income and
expenses. This is a total of 3 years of financial
information.
Organizations
existing less than 1 year:
You must provide projections of your income and
expenses for the current year and 2 years of
projected financial information. This is a total of
3 years of financial information.
When should I file Form 1023?
The form 1023 should be
filed within 27 months of the organization’s
formation with your state. There are exceptions for
those that file after 27 months. Please speak to a
representative of 501c3Web.com for more information.
Can I apply for grants and
donations before Form 1023 is approved?
Yes, you can start
applying for grants and donations prior to approval.
Most grants require you to receive tax exemption
prior to applying.
The IRS 501(c)(3)
approval is retroactive effective to the date of the
organizations legal formation or start of its
programs and services. This means that the donations
are tax deductive to the donor.