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Founding a charity or other non-profit organization can be a rewarding endeavor. Obtaining 501(c)(3) status for your organization is a vital part of starting a charity, as it ensures that you will be exempt from certain taxes and that donations to your organization will also be tax-exempt. The key to achieving tax-exempt status is submitting a completed Form 1023 application to the IRS. This guide on how to obtain 501(c)(3) status will provide a brief introduction to the steps you will need to take to achieve tax-exempt status for your non-profit organization.
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Tips on Obtaining 501(c)(3) Status
- Ensure that you are eligible to obtain 501(c)(3) status
- You must have an Employer Identification Number (EIN) to file for 501(c)(3) status
- Obtain a Form 1023 and related instruction guide from the IRS
- Consider retaining legal counsel if you do not fully understand the form and application process
- Include any and all requested and related documents with your application
- Be sure to include the applicable fee with your application
- Use the checklist included with Form 1023 to ensure you have completed the application
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Managed Since: 08/07/2009
Views: 349
Money Earned: M$16.34
Page revenue is subject to change as we obtain data from our partners
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Introduction
To achieve federal tax-exempt status for your non-profit organization, you will need to file a Form 1023, Application for Recognition of Exemption, with the IRS. Once this application has been approved, you will be recognized by the IRS as a tax-exempt organization under section 501(c)(3) of the U.S. tax code.IRS.gov: Application for Recognition of ExemptionAlthough filling out a form and submitting an application may sound like a simple task, it is actually a complicated and involved process that can take up to 60 hours.AllBusiness: How to Obtain 501(c)(3) Status for Your Corporation To increase the chances that your application is approved by the IRS, ensure that you have completed the application fully and accurately, and have supplied all the necessary supporting documents. If you don't fully understand the application or any of the questions therein, you may want to consider hiring a professional who is familiar with non-profit and taxation laws.Nolo.com: How to Obtain 501(c)(3) Tax-Exempt Status for Your Nonprofit
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Non-Profit Status
To qualify for tax-exempt status as a 501(c)(3) organization, you must be a designated non-profit organization. This means that if your organization produces any surplus revenue, this revenue cannot be paid out to employees, owners or shareholders in a manner other than that stated in the compensation portion of your application, but must be invested back into the organization to further its goals.ncstac.org: How to Establish a 501(c)(3)
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Activities
- To achieve 501(c)(3) status, your organization must be solely dedicated to activities that fall into at least one of the following categories:
- Charitable
- Educational
- Religious
- Scientific
- LiteraryAllBusiness: How to Obtain 501(c)(3) Status for Your Corporation
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Organization
To be eligible for 501(c)(3) status, your organization must be a corporation, trust, limited liability company or association. IRS.gov: Application Process IRS.gov: Form 1023 Application for Recognition of ExemptionThe official IRS website also offers a click-through questionnaire that will help you determine whether you are applicable and ready to apply for tax-exempt status.
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Step 2: Obtain an Employer Identification Number
To file a Form 1023 with the IRS, you are required to have an Employer Identification Number (EIN).IRS.gov: Form 1023 FAQ: EIN Required to Apply for Exemption To obtain an EIN, you will need to complete IRS Form SS-4, which you can do over the telephone, via fax or mail, or directly through the IRS website.IRS.gov: Obtaining an Employer Identification Number for an Exempt Organization -
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Step 3: Obtain Form 1023 and Instructional Guides
You can obtain a copy of Form 1023 directly from the IRS' official website, where it is available as a PDF file that can be downloaded and printed or filled out directly online. You should also obtain a copy of the 38-page instructional guide to filling out the form.For more information and instructions, you can also refer to IRS Publication 557: Tax-Exempt Status for Your Organization and IRS Publication 4220: Applying for 501(c)(3) Tax-Exempt Status. These instructions and publications are available to view or download from the official IRS website, or, if you do not have Internet access, you can phone the IRS and request that they mail you the form, instructions and related publications.IRS.gov: Application for Recognition of Exemption
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Step 4: Collect Your Organizing Documents
- To complete Part II of Form 1023, you will need to provide information on your organization's structure and include your organizing documents with your application. Depending on the organizational structure of your company, these documents may include:
- Articles of incorporation
- Articles of organization
- Operating agreement
- Trust agreement
- Bylaws
- Any amendments to the above documentsIRS.gov: Form 1023 Application for Recognition of Exemption
- If your organization is a corporation, you must include your articles of incorporation, along with proof that these articles have been filed with your state agency. Likewise, if you are applying for 501(c)(3) status as a limited liability company, you must include your articles of organization, along with certification that they have been filed with the state.IRS.gov: Form 1023 Application for Recognition of Exemption
- Regardless of which of the above documents you're including with your application, at least one of the documents must include two specific clauses. If your documents do not include these clauses, be sure to amend them or your application may be denied. In your Form 1023 application, note where in your organizing documents the following clauses can be found:
- That your organization will be engaged solely in at least one of the approved non-profit activities (charitable, educational, religious, scientific, literary)
- That any assets the organization may hold upon dissolution will be dispersed in an approved manner, such as a donation to another 501(c)(3) organization IRS.gov: Form 1023 Application for Recognition of Exemption Nolo.com: How to Obtain 501(c)(3) Tax-Exempt Status for Your Nonprofit
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Step 5: Write a Description of Your Activities
- Part 4 of your Form 1023 application will ask you to provide a "Narrative Description of Your Activities." In this description, you should describe, in detail, what your organization's past, present and planned future activities will be. For each activity, describe:
- Its purpose
- How much time will be dedicated to it
- Which member(s) of your organization will be performing the activity
- How it will be funded
- What the expected outcome will be
- If you have any documents that attest to or describe these activities, such as brochures, newsletters, written plans, donation receipts, and the like, be certain to attach them to the written description.IRS.gov: Form 1023 Application for Recognition of Exemption Nolo.com: How to Obtain 501(c)(3) Tax-Exempt Status for Your Nonprofit
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Step 6: Compensation
- Part V of Form 1023 will ask you to provide information on any salary or compensation to be paid to those involved with the organization, including, but not limited to:
- Employees
- Board members
- Owners/founders
- Directors
- Contractors
- You must also disclose whether any of those scheduled to receive compensation from the organization are related or closely affiliated with those who determine compensation. IRS.gov: Form 1023 Application for Recognition of Exemption AllBusiness: How to Obtain 501(c)(3) Status for Your Corporation
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Step 7: Budget and Financial Data
Part IX of Form 1023 will ask you to provide specific details on any past, present or planned financial activities. You are asked to provide financial information on your revenue and expenditures for four years. If your organization has not existed for four years, you should provide any available financial data and then estimate a budget for the remaining years. For example, if your organization has existed for one year, provide financial information for that year, and then use that information to estimate your financial activities for the remaining three years. Be sure that you include any and all income, assets and liabilities. Attach copies of itemized lists and receipts to your application whenever requested or applicable.IRS.gov: Form 1023 Application for Recognition of Exemption AllBusiness: How to Obtain 501(c)(3) Status for Your Corporation -
Step 8: Payment
You must include a user fee payment with your application in order for it to be processed. If you have earned or have projected earnings in excess of $10,000 over a four-year period, your fee is $750. If you have earned or are projected to earn less than $10,000 over four years, your application fee is $300.IRS.gov: Form 1023 Application for Recognition of Exemption -
Step 9: Complete the Applicable Schedules
Depending on the type of activities your organization will be engaged in, fill out Schedules A-H as applicable. These schedules are included with Form 1023.IRS.gov: Form 1023 Application for Recognition of Exemption -
Step 10: Review and Submit Your Application
Included in the Form 1023 application is a checklist that you should go through upon completing your application. The checklist details what documents you should include and in what order you should arrange them.IRS.gov: Form 1023 Application for Recognition of Exemption If you are unsure whether your application is complete or correct, consider retaining a lawyer experienced with non-profit tax law. Once you are confident your application is complete, mail it to the address provided on the application. -
Conclusion
Filing for and being granted 501(c)(3) status can be a lengthy and involved process. It is vital that you complete all sections of IRS Form 1023 and include any and all applicable documentation and financial records with your application. The more complete and correct your application is, the better chance your organization will have of being granted tax-exempt status in a timely manner. Be certain to refer to the instruction guide while completing your application and do not hesitate to seek professional help if you have questions or concerns regarding your application or the approval process.
