What Is a 501(c)(3) Determination Letter?

By Bryan Driscoll, J.D.

What Is a 501(c)(3) Determination Letter?

By Bryan Driscoll, J.D.

Before becoming a 501(c)(3) organization, you must apply for that status with the Internal Revenue Service (IRS). An examiner reviews your application to ensure all the required forms are complete and comply with the IRS guidelines. If everything is in order and your organization meets all IRS requirements, you will receive a determination letter approving your application and stating that you have 501(c)(3) status. Until you have this letter, you cannot operate as a tax-exempt nonprofit.

Businessman holding a piece of paper reading

Applying for Tax-Exempt Status

When you create a nonprofit organization, you are beginning down a long but charitable road. Tax-exempt status allows your business to operate more efficiently in serving the community by avoiding taxes. Your business can use this extra money to reinvest in the community and the public good. The application process for this status can be daunting, though, because you are required to provide a lot of detailed information. Any incomplete or inaccurate forms could cause a delay in processing your application.

Filing an Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (Form 1023) is the first step in gaining tax-exempt status. You need to provide information about your business structure and finances as well as state a specific purpose for being tax exempt. Possible reasons include being a charity, a church, a school, or other organization set up for the benefit of a community. You must also pay a fee when you submit your application.

Receiving and Storing Your Determination Letter

After you've completed your application for 501(c)(3) status, you start waiting. During this time, the IRS examiner reviews your application and any supporting documentation you submitted. This person must review all of your details and make sure your business qualifies under the IRS 501(c)(3) guidelines. If the examiner determines that your application is in order and your purpose qualifies for tax-exempt status, then they issue a determination letter.

This letter includes the date of determination and describes your responsibilities for filing annual returns. While qualifying nonprofit organizations are tax exempt, the IRS still requires your business to file annual returns. You complete a Return of Organization Exempt From Income Tax Under section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except private foundations) (Form 990) to report your annual income, expenses, and assets.

Your determination letter is a business record. As such, it must be kept in a safe and secure location. When you apply for grants or waivers from bank fees, they may require a copy of your determination letter. You also need to provide a copy of it when you file your annual returns.

Creating a nonprofit organization or converting your existing business to a nonprofit is an admirable and charitable step for your community but it requires a lengthy application process. Understanding that process, what you need to complete, and what documents you need to provide helps ensure your application is received and approved as quickly as possible. Without this understanding, you risk a delay or an outright denial of your application for tax-exempt status.

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