Date: November 21, 2023
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.
A 501(c)(3) tax exemption refers to the tax-exempt status granted by the Internal Revenue Service (IRS) to certain nonprofit organizations in the United States. Specifically, Section 501(c)(3) of the Internal Revenue Code outlines the criteria for organizations that qualify for tax exemption based on their charitable, educational, religious, scientific, literary, or other qualifying purposes.
Here are key points about a 501(c)(3) tax exemption:
Eligibility Criteria:
To be eligible for 501(c)(3) status, an organization must be organized and operated exclusively for one or more exempt purposes, such as charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
Prohibited Activities:
Organizations seeking 501(c)(3) status must refrain from engaging in certain activities, such as substantial lobbying and political activities. There are strict rules regarding political intervention, and violating these rules can jeopardize tax-exempt status.
Application Process:
Organizations must apply for 501(c)(3) status by submitting Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” to the IRS. The application includes detailed information about the organization’s activities, finances, governance, and more.
Tax Benefits:
Once granted 501(c)(3) status, an organization becomes eligible for various tax benefits. These may include exemption from federal income tax on income related to the organization’s exempt purposes, the ability to receive tax-deductible charitable contributions, and potential eligibility for grants and other funding opportunities.
Donor Contributions:
Donors to 501(c)(3) organizations can typically deduct their contributions from their taxable income, subject to certain limitations and conditions. This incentivizes individuals and businesses to support charitable causes.
Reporting Requirements:
501(c)(3) organizations are required to meet certain reporting obligations. This includes filing annual information returns (Form 990) with the IRS, providing transparency about the organization’s activities, finances, and governance.
Revocation of Status:
The IRS has the authority to revoke the tax-exempt status of organizations that fail to comply with the rules and requirements of Section 501(c)(3). Noncompliance with regulations, engaging in prohibited activities, or failure to file required reports can lead to revocation.
Applying for 501(c)(3) tax-exempt status involves a multi-step process, and it’s crucial to follow the guidelines provided by the Internal Revenue Service (IRS). Here are the general steps to apply for 501(c)(3) status:
1. Determine Eligibility:
Ensure that your organization meets the eligibility criteria for 501(c)(3) status. This typically includes being organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.
2. Incorporate Your Organization:
Before applying for 501(c)(3) status, your organization should be legally formed and incorporated in your state. This often involves filing articles of incorporation with the appropriate state agency. Click here for information on how to form a nonprofit in your state. Ensure your articles include the required IRS provisions below. Click here to access sample organizing documents on the IRS website.
Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article _____ hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
[Note: If reference to federal law in articles of incorporation imposes a limitation that is invalid in your state, you may wish to substitute the following for the last sentence of the preceding paragraph: "Notwithstanding any other provision of these articles, this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the purposes of this corporation.]
Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.
3. Obtain an EIN:
If your organization does not already have an Employer Identification Number (EIN), you will need to obtain one. You can apply for an EIN through the IRS website. Click here for the post on how to apply for an EIN.
4. Develop Organizational Documents:
Draft and adopt organizational documents, including your organization’s bylaws. These documents should clearly outline your mission, purpose, governance structure, and operational procedures.
5. Prepare IRS Form 1023:
The primary form for applying for 501(c)(3) status is IRS Form 1023 or 1023-ez, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” This form is comprehensive and requires detailed information about your organization. Click here to file electronically.
6. Gather Supporting Documents:
Along with Form 1023, you’ll need to provide various supporting documents, such as your organization’s bylaws, articles of incorporation, financial statements, and a narrative description of your activities and programs.
7. Pay the Application Fee:
There is a user fee for filing Form 1023. Click here to access the current fee schedule on the IRS website.
8. Submit the Application:
Applications are submitted electronically. Click here for information.
9. Wait for Processing:
The processing time for 501(c)(3) applications can vary, but it may take several months. You can check the status of your application online through the IRS’s Exempt Organizations Select Check Tool.
10. Respond to Requests for Additional Information:
If the IRS requires additional information or clarification, be prompt in providing the requested documents.
11. Receive Determination Letter:
Once your application is approved, you will receive a determination letter from the IRS. This letter officially grants your organization 501(c)(3) tax-exempt status.
Remember that the process and requirements may change, so it’s important to refer to the most current version of IRS Form 1023 and its instructions, which can be found on the IRS website. Additionally, you may want to consider seeking professional assistance from a consultant, attorney, or tax professional with experience in nonprofit filings.