Frequently Asked Questions
Are there other categories of nonprofit, tax-exempt organizations?
Yes…there are also IRC (Internal Revenue Code) Sections 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. The list is as follows:
501(c)(3) – Charitable, educational, religious, literary, testing for public safety, promotion of amateur athletics, prevention of cruelty to children or animals
501(c)(4) – Civic leagues and social welfare organizations
501(c)(5) – Labor, agricultural and horticultural organizations
501(c)(6) – Business leagues
501(c)(7) – Social and recreational clubs
501(c)(8) and 501(c)(10) – Fraternal beneficiary societies and domestic fraternal societies
501(c)(9) and 501(c)(17) – Employees’ associations
501(c)(11) – Teachers’ retirement fund associations
501(c)(12) – Local benevolent life insurance associations, mutual irrigation and telephone companies and like organizations
501(c)(13) – Cemetery companies
501(c)(14) – Credit unions and other mutual financial organizations
501(c)(15) – Mutual insurance companies
501(c)(16) – Corporations organized to finance crop operations
501(c)(18) – Employee pension fund trusts
501(c)(19) – Veterans’ Organizations
501(c)(20) – Group legal services plan organizations
501(c)(21) – Black lung benefit trusts
501(c)(22) – Withdrawal liability payment fund
501(c)(23) – Veterans’ organizations created before 1880
501(c)(24) – Surprise! There isn’t one.
501(c)(25) – Title-holding companies or Trusts for multiple parents
501(c)(26) – State-sponsored high-risk health coverage organizations
501(c)(27) – State-sponsored workers’ compensation reinsurance organizations
501(c)(29) – Qualified Nonprofit Health Insurance Issuers
For more information, see our article The Other Nonprofits.
What benefit does being 501(c)(3) offer my nonprofit and its contributors?
One of the primary benefits of being 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
Does nonprofit, 501(c)(3), and tax-exempt all mean the same thing?
Actually, no! These terms are often used interchangeably, but they all mean different things.
Nonprofit means the entity, usually a corporation, is organized for a nonprofit purpose.
501(c)(3) means a nonprofit organization that has been recognized by the IRS as being tax-exempt by virtue of its charitable programs.
Tax-exemption is the result of a nonprofit organization being recognized by the IRS as being organized for any purpose allowable under 501(c)(3) – 501(c)(27).
What does it mean to be a 501(c)(3) organization?
Being “501(c)(3)” means that a particular nonprofit organization has been approved by the Internal Revenue Service as a tax-exempt, charitable organization. “Charitable” is broadly defined as being 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.
For more information, see What is a 501(c)(3)?
What is the first step in starting a nonprofit?
The answer may not be what you expect. The initial corporate meeting is the essential first step in forming a nonprofit organization. It is at this meeting that the initial board of directors is installed and officer titles determined. The minutes (notes) of this meeting should include a resolution that shows unanimous affirmation by the initial board to establish the organization and pursue both incorporation and federal tax exemption. The purpose of the organization should be articulated in writing, as well.
Do we need our board of directors in place before we file paperwork?
The short answer is, “yes”. It is not necessary that you have every board position filled before paperwork is filed, but you need an initial board in place. In a nonprofit organization, it is the members of the board of directors who are legally accountable.
Do we need to incorporate?
Probably. There are a number of tasks involved with forming a nonprofit organization at the state level. The most important of these is the incorporation process. While it is possible to form a non-corporate, nonprofit organization, (and obtain federal 501(c) tax exemption), the vast majority of organizations choose corporate status.
Forming a corporation means that the founders, or incorporators, are creating a legal entity that exists wholly apart from the people involved with it. Most people prefer to form a nonprofit corporation, in part, because of the liability protection a corporation provides. For example, if a nonprofit corporation were to be sued, the assets of its directors and members are generally protected because corporate assets are distinct from personal assets.
What form is required to get 501(c)(3) status?
To obtain recognition as a 501(c)(3), tax-exempt entity, Form 1023 must be filed with the Internal Revenue Service. Form 1023 is a 29-page, comprehensive look at an organization’s structure and programs. Given the number of additional schedules, attachments and exhibits that may be required in addition to the application itself, most Form 1023 filings range between 50-100 pages of information.
Form 1023-EZ is a much more generalized document that does not require written budgets or narratives. Form 1023-EZ is specifically designed for certain, low-budget organizations.
With whom is Form 1023 filed?
Form 1023 is filed with the Exempt Organizations Division of the Internal Revenue Service in Cincinnati, Ohio, though it is now an electronic submission as of February 2020.
What is Form 1023-EZ?
Form 1023-EZ is a much more generalized version of the standard Form 1023 long form. Form 1023-EZ is a more streamlined method of filing designed for smaller nonprofits seeking 501(c)(3) status. Because this form is e-filed, the time it usually takes to get IRS approval is greatly decreased. The 1023-EZ does not require written budgets or narratives with the application.
Not all purposes or activities qualify for this process. In addition, on-going gross revenue is limited to under $50,000. For more information, see our Form 1023-EZ info page.
Within what time period does Form 1023 need to be filed?
Generally, Form 1023 should be filed within 15 months of the organization’s formation. For practical reasons, many organizations find it better to apply as soon as possible following formation. Extensions beyond 15 months may be possible under a variety of circumstances. After a period exceeding 27 months following corporate formation, retroactivity of 501(c)(3) status is likely limited.
Can I file Form 1023 before incorporating my nonprofit?
Yes, but it is not recommended. The IRS will allow unincorporated associations to apply, but these organizations will not have the inherent benefits associated with the corporate structure. In addition, the IRS will still require copies of an organizing document…and will subject the organization to corporate requirements regardless.
What are the fees to file Form 1023?
The IRS has a two-tiered filing fee structure. Organizations filing the standard Form 1023 pay a $600 filing fee when sending their application to the IRS. Organizations filing Form 1023-EZ pay a reduced $275 filing fee.
Can anyone complete Form 1023?
Technically, anyone can complete Form 1023. From a practical standpoint, it is usually advisable to enlist the help of a professional who specializes in the process, such as The Foundation Group. While the IRS rejects slightly less than 10% of applications filed, nearly half are abandoned by the filer…usually out of frustration or inability to answer tough, IRS follow-up questions. Out of approximately 80,000 applications filed annually, only half make it through the process.
Will my personal tax or financial situation have any bearing on my nonprofit receiving 501(c)(3) status?
No. There is no direct correlation between the organization and the financial, tax or credit status of any officer, director or employee.
How long does it take to complete Form 1023?
As stated in another answer, IRS Form 1023 is 29 pages long, plus required schedules and attachments. While every organization does not have to complete every page, a typical application package is between 50-100 pages of material. More important, however, is the amount of time required to complete the package. The IRS estimates a preparation time of well over 100 hours for a novice to prepare Form 1023.
Form 1023-EZ reduces that estimated time because the application is significantly shorter.
The Foundation Group prepares Form 1023 on behalf of its clients. Click here to learn more.
What information will be required on Form 1023?
In order for the IRS to make a determination on a standard Form 1023 application, specific questions must be answered relative to the organization’s legal structure, its governing board and potential conflicts of interest. More importantly, pages of detailed questions concerning the organization’s activities must be answered. This is in addition to a three-year projected budget (new organizations) or up to five years of financial history (existing organizations) and a written narrative essay outlining the organization’s programs, both current and planned, that will advance the organization’s exempt purpose. Add to that copies of supporting schedules and documentation and you have a basic application package.
The information requested on a Form 1023-EZ relates to more generalized questions of structure and compliance. No written budgets or narratives are required.
Can Form 1023 be “e-filed”?
Both Form 1023 and 1023-EZ must be submitted online via the pay.gov IRS portal.
Does Form 1023 need to be notarized?
Form 1023 does not need to be notorized, but it must be signed, under penalty of perjury, by an officer or director.
Can I start receiving contributions before Form 1023 is approved?
Generally, yes. IRS 501(c)(3) recognition is (usually) effective retroactively to the earlier of 1) the organization’s legal formation or 2) the commencement of its programs. This means that the organization’s activities are retroactively tax-exempt and donations are retroactively tax-deductible to the donor, extending even to prior tax years. In order for the program-commencement date to be considered the effective date of tax-exemption, however, there must be an organizing document of some kind. Signed minutes from an initial organizing meeting of the board of directors may be sufficient. Under certain circumstances, IRS tax-exemption may only be retroactive to the date of the filing of Form 1023. This is particularly true for organizations formed more than 27 months prior to applying for 501(c)(3) status.
The bigger issue here is state compliance concerns. Most states require nonprofits to register with that state’s Division of Charities (or similar department) prior to any fundraising activities.
Can I apply for grants before Form 1023 is approved?
Yes, but don’t expect much success with that. Most foundations, government agencies and other potential sources of funding will require an organization to possess an approved IRS 501(c)(3) determination letter.
Will my nonprofit be given a 501(c)(3) number separate from its Employer ID Number (EIN)?
No. Your EIN is the only number issued to your organization by the federal government. When your nonprofit’s 501(c)(3) status is approved by the IRS, you will receive a written notice, known as a letter of determination.
What happens if my nonprofit’s application for 501(c)(3) status is denied?
A denial by the IRS of 501(c)(3) status, known as an adverse determination, is a very difficult situation. An adverse determination can be appealed, but it is an enormous undertaking absolutely requiring professional representation. Alternatively, the organization may choose to apply again from scratch. In either case, it is usually an uphill battle to acquire 501(c)(3) recognition once an organization’s initial application has been rejected. All the more reason to consider acquiring competent assistance at the beginning of the process.
If my nonprofit is granted 501(c)(3) tax-exemption, will it be exempt from all taxes?
Probably not. Private foundations may still be subject to taxes on investment earnings and undistributed minimum grant allocations. All 501(c)(3) organizations may be subject to taxes on “unrelated business income.” 501(c)(3) organizations that have employees are subject to federal and state payroll taxes. Additionally, some states do not exempt 501(c)(3) organizations from sales and/or property taxes. It is important for the organization to know what is required in its state and locality.
Is there a state version of Form 1023 that must be filed?
In most states, no. While a handful of states have a simple, one- or two-page form that must be prepared, California is the only state that requires a separate application process rivaling the one required by the IRS. In California, federal tax-exemption does not eliminate state income tax liability until approval is received from the California Franchise Tax Board.
Organizations filing Form 1023-EZ are also required to file the entirety of the separate application to the California Franchise Tax Board.
All Foundation Group 501(c)(3) formation clients located in California receive assistance with the Franchise Tax Board process along with their federal work (this excludes Foundation Group Express or Core level clients).
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