Application for 501(c)(3) Tax Exemption

If you choose to apply for 501(c)(3) tax exemptions yourself, set aside an entire day to devote to the form; the IRS says it takes ten hours for the average person to complete. While line by line guidance on how to fill out Form 1023 and advice on strategy are beyond the scope of this Guide, here are some things to keep in mind:

1. Check whether your nonprofit corporation has to apply in order to gain 501(c)(3) status

Assuming that your nonprofit organization has been established as public charity with a 501(c)(3) purpose, you do not have to apply for federal tax exemption if the organization's gross receipts are normally less than $5,000 per taxable year.

  • The IRS states that a nonprofit organization does not normally have more than $5,000 annually in gross receipts if it had a total of:
i. $7,500 or less in gross receipts, during its first tax year

ii. $12,000 or less in gross receipts, during its first 2 tax years

iii. $15,000 or less in gross receipts, during its first 3 tax years

  • Note that if your nonprofit corporation brings in more than the $5,000 threshold, it must file Form 1023 within 90 days of the end of the year.
2. Before you start, make sure you have:
  • The current version of IRS Form 1023, which is the Application for Recognition of Exemption
  • The current version of IRS Form 2848 - Power of Attorney and Declaration of Representative (to allow someone other than your principal officer or director to represent the nonprofit corporation about issues concerning the application)
  • The current version of IRS Form 8821 - Tax Information Authorization (to authorize the IRS to provide information about the application to an employee other than a principal officer or director of the nonprofit corporation)
  • The federal EIN for your nonprofit corporation
  • Your mission statement
3. Complete IRS Form 1023 soon after incorporating

You will want to have your tax exempt status retroactive to the date of incorporation, so that your nonprofit corporation can take advantage of the exemptions and so that any donations are tax-deductible. You have 15 months from the date of incorporation to file Form 1023, with a 12 month extension. (If you delay, your tax exempt status is retroactive to the date of application.)

4. Request public charity classification in Part X of your application

Every organization that qualifies for 501(c)(3) exempt status is further classified into a public charity or a private foundation. Private foundations are subject to different tax obligations and the IRS imposes additional restrictions and requirements on them. In all likelihood, you will want your nonprofit organization to avoid being classified as a private foundation. To do so, you must give notice to the IRS that your organization is not a public charity. You do this in Part X of 1023, usually by checking the box next to Line 5g, 5h, or 5i (depending on the nature of your funding).

5. While Your Application Is Pending

While waiting for the IRS to approve your application, your nonprofit corporation may operate as a tax-exempt organization. When you file your annual federal and state information returns for your nonprofit corporation, note that your 501(c)(3) application is pending IRS approval.

6. Advance and Definitive Rulings

If you have not completed a tax year of at least 8 months at the time of application, you must ask for an advance ruling.

  • The IRS will issue an advance ruling if it believes that the information you have submitted qualifies your nonprofit organization for tax-exempt status. After five years, the IRS will again look at your nonprofit corporation's annual information returns to evaluate whether the nonprofit corporation has been operating according to the requirements set forth in 501(c)(3). At this point, the IRS will issue a determination letter containing a definitive ruling, in which it will either reject your application or recognize your nonprofit corporation's exempt status and provide its public charity classification.
If you have completed a tax year of at least 8 months at the time of application, you may ask for a definitive ruling or an advance ruling.
  • Although advance rulings are tentative, they do have certain advantages. They are easier and faster to obtain, and at the end of the process, the IRS has the benefit of five years of actual operation details on which to base its conclusion. If you are an established nonprofit that clearly qualifies for public charity status, you may want to take the risk and request a definitive ruling. However, the better option for most nonprofit organizations is to request an advance ruling. You will have to weigh your options and figure out which one works best for you.
Note that the determination letter is an important document that should be filed in the corporate records book. Additionally, read the determination letter carefully. If you have any questions about its contents, call the IRS in order to completely understand how the IRS classifies your nonprofit corporation. If the letter describes your nonprofit corporation as a private foundation, seek legal help immediately to understand the implications of such a classification.

7. Know your audience

Remember that your application is not only going to be read by the IRS, but also (at least potentially) by members of the public.

8. Sign up for "Exempt Organizations Update"

Stay abreast with the latest developments about 501(c)(3) with Exempt Organizations Update, a newsletter published by the IRS.