We strongly recommend seeking the assistance of an attorney in applying for Section 501(c)(3) status. If you choose to apply for 501(c)(3) tax exemptions yourself, set aside an entire day to devote to the form; the IRS says it takes ten hours for the average person to complete. It is also important to understand how the IRS evaluates these applications; you can find more information about that process here.
While line by line guidance on how to fill out Form 1023 and advice on strategy are beyond the scope of this Guide, here are the steps you will need to take when you are ready to start the application process:
1. Ensure that your venture is organized as a nonprofit corporation under state law
With very few exceptions, you must be formally organized as a nonprofit corporation under the laws of a particular state in order to be eligible for a federal tax exemption. Information about forming a nonprofit corporation can be found here.
2. Check whether your nonprofit corporation has to go through the IRS application process in order to gain tax-exempt status
Assuming that your nonprofit organization has been established as public charity with a 501(c)(3) purpose, you do not have to apply for federal tax exemption if the organization's gross receipts are normally less than $5,000 per taxable year.
- The IRS states that a nonprofit organization does not normally have more than $5,000 annually in gross receipts if it had a total of:
i. $7,500 or less in gross receipts, during its first tax year
ii. $12,000 or less in gross receipts, during its first 2 tax years
iii. $15,000 or less in gross receipts, during its first 3 tax years
- Note that if your nonprofit corporation brings in more than the $5,000 threshold, it must file Form 1023 (Application for Recognition of Exemption) within 90 days of the end of the year.
- A solid understanding of what the IRS is looking for in an application for tax exempt status. See our Guide to the IRS decision-making process for journalism organizations. There are many potential pitfalls in this process. We strongly recommend reviewing this guide before applying for an exemption.
- The current version of IRS Form 1023, which is the Application for Recognition of Exemption
- IRS Instructions to Form 1023
- The current version of IRS Form 2848 - Power of Attorney and Declaration of Representative (to allow someone other than your principal officer or director to represent the nonprofit corporation about issues concerning the application)
- The current version of IRS Form 8821 - Tax Information Authorization (to authorize the IRS to provide information about the application to an employee other than a principal officer or director of the nonprofit corporation)
- The federal EIN for your nonprofit corporation
- Your mission statement
- Your corporate records book for access to the nonprofit organization's articles of incorporation, its bylaws, and information on the directors, officers, and employees
- Resources such as:
- IRS Publication 557: Tax-Exempt Status for Your Organization
- IRS Publication 4420: Applying for 501(c)(3) Tax-Exempt Status
- IRS Publication 4421: Compliance Guide for 501(c)(3) Public Charities
- A telephone, in case you want to call the IRS customer service hotline for exempt organizations at (877) 829-5500
You will want to have your tax exempt status retroactive to the date of incorporation, so that your nonprofit corporation can take advantage of the exemptions and so that any donations are tax-deductible. You have 15 months from the date of incorporation to file Form 1023, with a 12 month extension. (If you delay, your tax exempt status is retroactive to the date of application.)
5. Request public charity classification in Part X of your application
Every organization that qualifies for 501(c)(3) exempt status is further classified into a public charity or a private foundation. Private foundations are subject to different tax obligations and the IRS imposes additional restrictions and requirements on them. In all likelihood, you will want your nonprofit organization to avoid being classified as a private foundation. To do so, you must give notice to the IRS that your organization is a public charity. You do this in Part X of 1023, usually by checking the box next to Line 5g, 5h, or 5i (depending on the nature of your funding).
6. While Your Application Is Pending
While waiting for the IRS to approve your application, your nonprofit corporation may operate as a tax-exempt organization. When you file your annual federal and state information returns for your nonprofit corporation, note that your 501(c)(3) application is pending IRS approval.
7. Advance and Definitive Rulings
If you have not completed a tax year of at least 8 months at the time of application, you must ask for an advance ruling.
- The IRS will issue an advance ruling if it believes that the information you have submitted qualifies your nonprofit organization for tax-exempt status. After five years, the IRS will again look at your nonprofit corporation's annual information returns to evaluate whether the nonprofit corporation has been operating according to the requirements set forth in 501(c)(3). At this point, the IRS will issue a determination letter containing a definitive ruling, in which it will either reject your application or recognize your nonprofit corporation's exempt status and provide its public charity classification.
- Although advance rulings are tentative, they do have certain advantages. They are easier and faster to obtain, and at the end of the process, the IRS has the benefit of five years of actual operation details on which to base its conclusion. If you are an established nonprofit that clearly qualifies for public charity status, you may want to take the risk and request a definitive ruling. However, the better option for most nonprofit organizations is to request an advance ruling. You will have to weigh your options and figure out which one works best for you.
8. Know your audience
Remember that your application is not only going to be read by the IRS, but also (at least potentially) by members of the public.
9. Sign up for "Exempt Organizations Update"
Stay abreast with the latest developments about 501(c)(3) with Exempt Organizations Update, a newsletter published by the IRS.