The non-profit entity has been formed, the board of directors is in place, and your bylaws have been written. You’re ready for the final piece of the puzzle: applying for tax-exempt status. Becoming a 501(c)(3) organization means that the federal government views you as a non-profit organization that doesn’t pay federal taxes on money raised. Your donors may also be able to write off any charitable donations come tax season.
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How to Apply for 501(c)(3) Status: The Basics to Complete Form 1023
Tax identification number
Obtain a tax identification number from the IRS. This is called the Federal Employer Identification Number (EIN) and it functions like a social security number, but for a business or entity. You’ll need the EIN to open business bank accounts and to complete Form 1023. Apply for your EIN by filing form SS-4, Application for an Employer Identification Number.
Short form vs. long form
There are two different versions of Form 1023, and which one you use depends you’re your projected donations and assets within the first three years of operation. In general, the short form is a time and money saver for qualifying organizations, so make sure you research appropriately to find where your organization falls. Download our free guide to applying for tax exempt status in order to learn more about the decision points involved in choosing between the short and long forms.
The filing cost for Form 1023 is $600. Organizations that qualify for Form 1023-EZ pay a reduced filing cost of $275.
The timing from the moment you file the form to receiving a determination letter varies. The IRS uses a specific method for screening these applications, but many things can delay processing, such as issues with the application itself, government shut-downs, or any other event that results in a backlog of applications.
It’s possible to request an expedited process if you’ve been offered a grant that’s contingent upon 501(c)(3) status. In other words: be prepared to wait.
Accepting donations before receiving an acceptance letter
You may experience a window of time in which people want to donate to your non-profit, but you’re not yet in possession of an acceptance letter. That’s okay. Disclose to potential donors that your 501(c)(3) status is pending. If they still decide to make a charitable donation, they’re assuming the risk of the determination letter not coming through.
If your application is approved up to 27 months after incorporating, your 501(c)(3) status will be retroactive to the incorporation date. Another option: work with a fiscal sponsor during the start-up period in order to ensure donors their contributions are deductible.
Applying for 501(c)(3) status may seem daunting or intimidating, but it doesn’t have to be. The process will help you to create plans and structure that will set your organization up for long-term success. Don’t let a form stand in the way of the big changes you envision.
If you’ve done your research and created a strong, workable plan for your non-profit organization, you’re ready to form a legal entity and apply for tax-exempt status. Download our free guide to the basic steps you’ll need to take and set your organization up to succeed for years to come.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.