What Is Required to File a 501c3?

By Wayne Thomas

Being approved for 501(c)(3) tax-exempt status by the Internal Revenue Service can be a landmark day for any nonprofit, as it makes the organization more attractive to potential donors. However, becoming an exempt entity is limited to only certain organizations and requires providing detailed information to the IRS. Understanding which forms to file and what information must be included can help avoid confusion and delays in the process.

Overview

Obtaining 501(c)(3) tax-exempt status under the federal tax code means that a nonprofit is not required to pay federal income taxes. While this serves as an important benefit to the organization by itself, other benefits flow from the status. Gaining tax-exempt status increases credibility and indicates to potential donors that the nonprofit has a charitable purpose, is accountable to the public and has a formal structure. This in turn can increase the likelihood of receiving donations.

Limitations

In order to qualify for 501(c)(3) status, the organization must demonstrate that it is either a public charity or private foundation. The latter category is generally subject to more restrictions, so it is usually advisable to file as a public charity. This designation requires the organization to refrain from engaging in political or legislative activities, while also meeting the IRS definition of serving a "charitable purpose," limited to those nonprofits that benefit some specific section of society or the general public. Further, the organization needs to be publicly supported, generating funds from the government, grants or multiple private donors.

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Documents and Information Required

A nonprofit pursuing 501(c)(3) status must provide additional information in its organizing documents and file more forms with the IRS than a for-profit corporation. Specifically, an organization's Articles of Incorporation need to include language regarding the charitable purpose of the nonprofit. Next, IRS Form 1023 must be completed and filed with the IRS. Finalizing this document can be time-consuming and requires an Employee Identification Number, financial statements and filing fee. If the form is filed within 27 months from when you formed the nonprofit, the organization will be treated as an exempt entity from the time the nonprofit was formed. If completed after 27 months, the exempt status will not begin until the date the form was filed with the IRS.

Use of Status While Application is Pending

If the organization is approved as an exempt entity, the IRS will retroactively apply 501(c)(3) status to the date of formation or date of filing the form, depending on when the organization files. What this means is that the nonprofit can operate as a tax-exempt organization while the application is pending. This can be very helpful for organizations eager to engage in fundraising, particularly given that review of the application can take months.

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

References

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