There’s a good chance that if you are just in the process of forming a nonprofit, you have yet to apply for 501c3 status.
501(c)(3) refers to the IRS tax code that allows religious, charitable, and educational organizations a federal tax exemption. By becoming a certified 501c3, your organization is not liable to pay federal income tax and can collect tax-exempt contributions.
That sounds great, right?
Unfortunately, the application process is quite extensive and can seem daunting for an organization just starting up.
While going through the IRS application process, you will need to be as organized and thorough as possible. You’ll likely need “all-hands-on-deck,” so to speak. Taking the time to do it right the first time will save you mountains of time down the road.
The first thing to know about applying for 501c3 status is that, in some cases, it is actually a subjective process. This means that, aside from providing all the data that the IRS requires, you must essentially “sell” the idea that your organization is working for the common good.
The good news is that, with forethought and support, you can successfully handle the application process. Check out this list of 5 tips that will help you in your journey to attaining the 501c3 nonprofit tax-exemption status.
Figure Out If You Qualify
The first question you may be asking is whether your organization qualifies for 501c3 status.
Let’s start out with the purpose of your organization. You must fall into one of these 8 categories in order to apply for tax exemption:
- Charitable (including poverty relief, combating discrimination, advancing education, etc.)
- Religious
- Educational
- Testing for public safety
- Literary
- Youth/amateur sports competition
- Scientific
- Cruelty prevention for children and animals
Next, consider how you are incorporated. In order to qualify as a 501(c)(3), you must be a corporation, trust, or unincorporated association. If you have yet to incorporate, speak to a qualified legal consultant to discuss which option is best for your organization.
Now, think about your day-to-day operations. You must meet these criteria in order to qualify:
No one affiliated with your organization is allowed to personally profit from revenue, including employees and shareholders.
- No political campaign engagement
- Voter registration is allowed, but it must be bi-partisan
- Larger nonprofits may engage in lobbying efforts not to exceed $1 million annually
- Maintain up-to-date financial records
- File an annual 990 form
You will then need to consider your organization’s assets. A 501(c)(3) must file all assets as exempt, meaning that if the organization dissolves for any reason, assets will be distributed to other charities.
If you meet these criteria, great! It is now time to start the application.
Know the Application
Not only do you need to be aware of which application you need to complete, but it is also important to know the information that will be asked in the application.
All potential 501c3 applicants need to complete 1 of 2 forms: Form 1023 or Form 1023-EZ.
- Form 1023: The traditional 26-page application that is used by larger nonprofits
- Form 1023-EZ: A condensed 3-page application that can be used by organizations with gross receipts of less than $50,000 and less than $250,000 in assets.
The IRS claims that over 70% of applicants are eligible to complete Form 1023-EZ. If you meet the financial qualifications, then you are in luck! This application requires much less information.
Form 1023-EZ asks for your organization’s complete contact information, organizational structure, defining purpose and activities, foundation details (if applicable), and signature.
The long Form 1023 requires a significantly larger pool of information. You will need to gather information to fill out the following sections: contact information, organizational structure, defining purpose, a complete narrative detailing your activities, compensation of shareholders and essential staff, beneficiaries of your organization, organizational history, special activities (lobbying, fundraising, etc.), financial statements, public charity status, and signature.
It really helps to study the application instructions (provided with the application) in their entirety before you begin.
Mobilize the Troops
So, you now know whether you qualify and which application to use. You have likely read the instructions and are ready to begin completing the application. Now, it’s time to gather your team.
You may be wondering why you should bring everyone to the table right from the get-go. Let me tell you- even the simplest mistakes can result in a costly delay. It’s best to have multiple sets of eyes scanning the application during each step.
Schedule a specific time to meet with your President/CEO, Finance Director/CFO, Operations Director/COO, and your Board President, or those of equivalent ranking within your organization.
Designate the appropriate sections for each director ahead of time. For example, your CFO should handle the financial paperwork, the COO can complete the narrative, and the CEO and Board President the organizational history, special activities, etc.
Then, go through the entire application step-by-step. Most of the sections are straightforward and factual, especially if you are only completing the 1023-EZ.
Remember, the key to a well-run organization is having a solid team in place. Completing this application together is one of the first steps in a long journey of teamwork.
The Narrative- Make Every Word Count
If you are required to complete the long-form narrative, it is essential that you give some thought to this section. Applications are often delayed for lack of detail in this area.
Some consider this the “heart” of your application- and for good reason- so it is best to have the input of your organization’s decision-makers (as mentioned above). If your organization’s mission is clear, this should be easy. To make yours stand out, follow these suggestions:
- Detail your activities by describing who, what, where, when, why, and how your organization is run.
- Refer to attachments to your application, including brochures, newsletters, and other relevant documents.
- Make an argument for tax exemption. Refer back to the IRS tax code after detailing each activity in which your organization participates. For example, “Section 1.501(c)(3)-1(d)(3)(i)(a) of the regulations describe the term educational to mean training an individual to develop capabilities and XXX organization does this by…”
Detail your activities to show how your organization has worked, is working, and will continue to work for the common good. Be clear, concise, and thorough.
Proofread Proofread Proofread
Did I mention that mistakes can be costly?
As of January 2016, there is no backlog of applications. However, processing can take up to 90-days for the Form 1023-EZ and 180-days for the long Form 1023.
An error in any area can, unfortunately, delay your application’s already long processing time.
Many organizations do not pay the correct application filing fees. To clarify:
- Form 1023- EZ requires a $400 processing fee
- Form 1023 requires an $850 processing fee
There are numerous other common mistakes that applicants often make. It is best to:
- Check your bylaws/Articles of Incorporation to make sure that your organization has a clearly written dissolution clause.
- Review your financial statements with an outside accountant or another third party.
Ensure that your paperwork is signed. - Avoid delays by having each team member review the application for accuracy and completeness.
The road to 501c3 status may be long, but it is definitely worth it. Aside from federal tax exemption, nonprofits may qualify for state tax exemption, property tax exemption, discounts on bulk mail from the United States Postal Service, and the ability to apply for grants.
Best of luck to you and your organization on your journey to 501c3 status!
