Obtaining Tax-Exempt Status

Obtaining 501(c)(3) Tax-Exempt Status

By Jeremy Chen

The defining feature of a nonprofit organization is its tax-exempt status. With it, nonprofits can accept donations and offer donors tax deductions for their contributions. The process for obtaining 501(c)(3) tax-exempt status is based on an application filed with the IRS, which is typically submitted shortly after the organization is legally formed. The next step is for the organization to wait for a favorable determination letter from the IRS.

The application process, as described above, seems straightforward enough, but there are potential speed bumps along the way if the organization’s foundation is not properly established or the application is not properly prepared. For example, if the organization does not prepare its founding document (articles of incorporation) to include specific provisions required by the IRS, then the organization will have to amend its articles to include those necessary provisions before moving forward. Further, an application with missing information usually results in the IRS requesting the organization to provide it, thereby increasing the application review time.

Depending on the type of planned activities and the amount of total assets of an organization, it may qualify to file either the standard IRS Form 1023 or the shorter Form 1023-EZ. Any organization of any size may use the standard Form 1023, which is a comprehensive 26 pages in length. Generally, smaller domestic organizations that generated less than $50,000 in gross revenue in each of the past three years and have less than $250,000 in total assets qualify to use Form 1023-EZ (other restrictions may apply). Form 1023-EZ was designed to reduce the IRS’s backlog of applications by streamlining the application to 3 pages, and by requiring online filing.

A nonprofit has 27 months after formation to file its application for tax-exempt status with the IRS. After that time period, the organization must qualify for an exception to have its effective date of exemption go back to the date of legal formation. If the organization does not qualify for an exception, then the effective date of exemption will only go back to the date the application was filed.

Lastly, some organizations are not required to file an application for tax-exemption to be tax-exempt. The three types of nonprofit organizations that are automatically tax-exempt are schools, churches, and hospitals. Nonetheless, these types of organizations may want to file their own Form 1023 if they have donors that require an IRS determination letter before it will give donations.

Disclaimer. The information in this article is not legal advice, and is provided only for informational purposes. This article is only a general discussion, and does not include all relevant information regarding the topics and issues addressed within it.

IRS Circular 230 Notice. To ensure compliance with requirements imposed by the IRS, this law practice informs you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter(s) addressed herein.

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