Many nonprofits will be familiar with the section 501(c)(3) tax category. Those who qualify for this status are exempt from federal income tax. Donations to most 501(c)(3) organizations are also eligible for federal tax deductions. It is this reason that many individuals and organizations prefer to donate to nonprofits in this category.
The process by which a nonprofit can qualify as a 501(c)(3) entails filling out an application with the Internal Revenue Service. While this is the short of it, in actuality the application is lengthy, and there are additional steps that need to be taken in order to prepare for the application process.
To help you understand what’s involved, here is a quick overview and some general guidelines to help you on your way:
Organizations with the following characterizations may qualify for 501(c)(3) status:
· Religious
· Charitable
· Scientific
· Literary
· Educational
· Fostering national or international amateur sports competition
· The prevention of cruelty to children or animals
· Private Foundations
· Political Organizations
· Other Nonprofits: social welfare organizations, civic leagues, social clubs, labor organizations, business leagues
To be eligible, the nonprofit must be organized as a corporation (including a limited liability company), unincorporated association, or trust.
Nonprofits will need an EIN, or Employer Identification Number. This is assigned by the IRS to identify taxpayers who must file business tax returns. Learn more here.
Before applying for 501(c)(3) status, your nonprofit should have the following:
· Business name
· Board of Directors
· Articles of Incorporation (usually filed with your state’s Secretary of State office)
· Nonprofit Bylaws – the rules and policies for operation of your nonprofit
· Nonprofit Conflict of Interest Policy
· Any necessary licenses and permits
When you’re ready, file form 1023 or 1023-EZ with the IRS. Forms and instructions can be found here.
The application fee starts at $275. A more detailed breakdown is provided in Appendix A of the IRS’ Exempt Organizations User Fees.
While becoming a 501(c)(3) organization may be an involved process, it is a coveted status many nonprofits find worth their time. The IRS receives an average of over 80,000 applications per year from nonprofits. Should you attain 501(c)(3) status, you will need to file Form 990 every year to maintain your tax-exempt status. This information return is also made available to the public so you will want to ensure that you file on time and that the information is accurate.