Applying for 501 (c)(3) tax-exempt status

There are many good reasons to form a nonprofit organization and apply for 501(c)(3) status. Once you gain official federal tax-exempt status, you can save money on taxes and have a better chance at winning grants. Formally becoming a 501(c)(3) also elevates your position in the eyes of others and may make it easier for you to win support and receive donations to help your cause. In fact, there's a big benefit to your donors as well—having 501(c)(3) status generally allows them to deduct donations on their federal income taxes.

In this guide, we'll explain how to apply for 501(c)(3) status and what organizations are eligible.

What is a nonprofit?

A nonprofit organization is one whose purpose is not to earn a profit but instead to do charitable work or perform a public service. Nonprofits qualify to apply for federal tax-exempt status. A tax-exempt organization is officially recognized by the Internal Revenue Service (IRS) as exempt from paying federal income taxes.

A 501(c)3 organization is a type of charitable organization that meets specific provisions in the Internal Revenue Code and has received recognition of IRS 501(c)(3) status. A charity or nonprofit organization does not need this designation to form or to receive donations. However, if your charitable organization does not qualify for other types of tax-exempt statuses, you are considered a for-profit entity and thus subject to federal income tax.

Many people don't realize that a nonprofit actually is a business entity. Like a for-profit business, a nonprofit must have a business legal form and business formation documents such as articles of incorporation.

Nonprofit vs. federal tax-exempt status

Being a nonprofit is not exactly the same as having federal tax-exempt status. A nonprofit means that an organization is set up to provide assistance or further a cause rather than to make money like a for-profit business, but that alone does not automatically confer tax exemption. To obtain federal tax-exempt status, a nonprofit organization must complete an official process through the IRS that involves filling out the appropriate legal form and paying an appropriate user fee. The IRS will then determine whether the nonprofit qualifies for tax exemption. IRS 501(c)(3) status is one type of tax exemption, but there are other types as well. The type of tax exemption you qualify for depends on the purpose of your organization.

Who can apply for tax-exempt status?

The IRS needs to make sure that any organization granted tax-exempt status is truly a qualifying public charity, private foundation, or other nonprofit and not a for-profit business or political lobbying organization.

To be eligible to form a 501(c)3 organization, you must determine that your nonprofit falls under one of the exempt purposes listed in this section of the Internal Revenue Code. Qualifying purposes for a tax-exempt nonprofit include:

• Charitable
• Religious
• Educational
• Scientific
• Literary
• Testing for public safety
• Fostering national or international amateur sports competitions
• Preventing cruelty to children or animals

Examples of the types of organizations that may be eligible for 501(c)(3) status include charitable organizations public charities, churches and religious organizations, private foundations, and political organizations. These organizations may include groups centered around arts and culture, social services, or advocacy on behalf of animal rights or environmental causes.

Other types of eligible organizations can qualify for tax-exempt status under different sections of the law, such as section 501(c)(4), including civic leagues, agricultural organizations, chambers of commerce, fraternal societies, and other such services and social clubs.

A complete list of qualifying organizations can be found in the Internal Revenue Code, Section 501(c). Action organizations that seek to influence legislation do not qualify and neither do organizations with income that benefits private individuals.

In addition to having an exempt purpose under IRS rules, an organization must have the proper legal form. This means the nonprofit must be organized as an association, a corporation, or a trust. The organization also must have an IRS employer identification number (EIN).

Why apply for 501(c)(3) status?

Eligible nonprofit organizations can gain many benefits from applying for and getting 501(c)(3) status. The primary benefit of IRS 501(c)(3) status is federal tax exemption that allows nonprofits to maximize the good they do with their funds and stretch their money much further. Becoming a 501(c)(3) also confers respectability in nonprofit organizations and builds community trust. Many donors do research before deciding to donate to a charity, and seeing that a group has 501(c)(3) status may make them feel confident that they will not fall victim to a charity scam or have their fund misused. In fact, organizations like Charity Navigator recommend that donors check for an employee identification number, or EIN, and 501(c)(3) status before opening their wallets or jumping on board to volunteer their time and expertise to a group. This means that getting federal tax-exempt status may substantially increase donations and even opportunities for community partnerships with volunteers, local government, and other organizations and nonprofits.

How do I apply for 501(c)(3) status?

To apply for 501(c)3 status, start by registering your organization with your state and then file your request with the federal government. Follow these steps to complete the 501(c)(3) application process:

1. Search your state's Secretary of State business database to be sure the name you have chosen for your organization is available.
2. Complete your state's corporation registration process, which includes creating articles of incorporation and indicating what kind of nonprofit your entity will be.
3. Apply for an employee identification number (EIN) from the IRS, which functions as your organization's tax number, similar to a Social Security number for an individual.
4. File IRS Form 1023, Application for Recognition of Exemption under Section 501(c)3 of the Internal Revenue Code, or for smaller nonprofits, Form 1023-EZ, the streamlined version. Use Form 1023-EZ if your organization has less than $50,000 in gross receipts and less than $250,000 in assets, and use Form 1023 if your organization has too much income or assets to qualify for the EZ form. You have 15 months from the date you formed your organization to file the appropriate legal form, but extensions are available. The form is lengthy, detailed, and complex, so you may need professional assistance to complete it. Some nonprofits choose to hire an attorney or seek help from a company that offers filing services to complete this form.
5. Request a state tax exemption by submitting your IRS determination letter of tax-exempt status to the appropriate state entity if your state requires this.
6. Request state charitable solicitation status, which most states require if you will be seeking donations.
7. Write your corporation's bylaws—the rules it will follow as it does business, convenes meetings, votes, and holds elections.
8. Appoint a board of directors to assist you in running the nonprofit.

Smaller nonprofits eligible to file the streamlined version of the IRS application form may find the process shorter and easier to complete than larger nonprofits required to file the standard form.

You will receive a determination letter from the IRS about your tax-exemption status. You must meet all the requirements outlined by the IRS in order to obtain 501(c)(3) tax exemption.

What do I need for my IRS 501(c)(3) application?

Before you start the 501 (c)(3) application process, it's a good idea to make sure you are eligible to apply for 501 c3 status or tax-exempt status. Then gather the items you need to apply so you have all the documents in one place. To complete your 501(c)(3) application, you will need the following information:

• The appropriate legal form for your organization—either Form 1023 or Form 1023-EZ—to fill out. Larger organizations with more than $50,000 a year in gross receipts or more than $250,000 in assets must use the more complicated Form 1023, while smaller nonprofits may use the streamlined form.
• An EIN from the IRS to identify your organization.
• A copy of your organization's organizing document, such as the articles of incorporation, articles of association, or trust agreement, depending on the legal form of your nonprofit. For exemption under section 501(c)(3), the organizing documents must limit the purpose of the nonprofit to one or more of the exempt purposes outlined in IRS section 501(c)(3). The organizing documents also must contain the dissolution clause required by section 501(c)(3) unless state law satisfies the requirement.
• Understanding of your organization's IRS foundation classification. Organizations eligible for 501(c)(3) status must fall into one of two foundation classifications—public charity or private foundation, so you'll need to determine which one fits your nonprofit. Public charities tend to receive many smaller donations from a large number of supporters, while private foundations tend to receive fewer larger donations from a smaller number of supporters. Most nonprofits qualify as public charity.
• Required financial data for your organization. The financial information you need to submit will vary depending on the form you use. Form 1023-EZ, for smaller nonprofits, requires much less financial data than Form 1023.
• User fee. You can pay the appropriate user fee to the IRS by credit card or direct debit from your bank account.

Organizations with a representative that will act on their behalf will need to file a power of attorney form with the IRS for authorization. While it can be helpful, you don't need an attorney to apply for 501(c)(3) status with the IRS. However, there are a number of benefits to consulting an attorney during the application process. For example, an attorney can help you to make sure you have all the required financial information and other details. Then they can help you submit it correctly, possibly helping you to avoid mistakes and save money. But attorney fees can be costly, and nonprofit organizations on a budget can complete the process on their own without seeking legal advice.

What is a federal employer identification number?

You must obtain a federal employer identification number (EIN) before you can apply for recognition of tax exemption from the Internal Revenue Service.

A federal employer identification number (FEIN) is a number from the IRS that is used to identify a for-profit business or nonprofit organization. The IRS requires any business or organization with employees to have a FEIN, but even a sole proprietor with no employees can obtain one. The process of getting a federal employer identification number from the IRS is quick, easy, and free.

Costs of filing for a 501(c)3

Although your organization is not intended to make a profit, unlike a for-profit business, some filing fees and other costs are associated with legally obtaining nonprofit status. Here are costs and expenses you need to consider:

• State incorporation fee. Each state has its own fee schedule for filing incorporation papers and obtaining copies of your registration, generally ranging from $25 to over $100.
• IRS fee. You will need to pay the IRS a user fee of $600 to file Form 1023 or $275 to file Form 1023-EZ.
• Annual report. Your organization will need to file an annual report with your state, and fees will vary—usually between $5 and $25—but possibly more.

Forming a nonprofit organization requires careful planning and attention to detail, but checking all the boxes will allow you to start on the right foot and meet your goals.

How to maintain status as a 501(c)3

Once you receive recognition of federal tax-exempt nonprofit status from the IRS, you'll need to take steps to maintain 501(c)(3) status. It's easy to maintain 501(c)(3) status with the IRS by taking two actions—filing an annual report every year as required by the IRS and avoiding activities that would jeopardize IRS recognition of your federal tax exemption. The IRS wants to make sure you continue to run an eligible nonprofit and don't engage in business activities that are incompatible with 501(c)(3) status.

For example, nonprofits wanting to maintain status as a 501(c)(3) must avoid:

• lobbying
• participating in political campaigns
• earning too much money in business income unrelated to the purpose of the organization.

Note that nonprofits also must avoid providing substantial benefits to any private individuals, such as board members, officers, or employees of the organization.

FAQs about tax exemption and 501(c)(3) status

What is the difference between a 501(c) and a 501(c)(3)? There are nonprofit organizations that may not qualify for 501(c)(3) tax exemption but may still qualify for federal tax exemption under a different section of IRS 501(c), such as 501(c)(4). Examples of organizations that may apply for 501(c)(4) tax exemption include volunteer fire companies, civic leagues, and social welfare organizations. The main difference between these 501(c) and 501(c)(3) statuses is that donors to non-501(c)(3) organizations may not be able to deduct donations to these groups on their federal income taxes.

How much is a 501(c)(3) in Texas? The cost of a 501(c)(3) in Texas includes the Texas state incorporation fee, the IRS user fee for Form 1023 or Form 1023-EZ, and the cost of filing an annual report with the state of Texas. The Texas incorporation fee to form a nonprofit corporation or cooperative association is $25. The IRS user fee is $275 for a Form 1023-EZ or $600 for Form 1023. The Texas annual report fee for a nonprofit corporation is $5. So it costs $305 or $630 to form a 501(c)(3) in Texas. Nonprofits that must file IRS form 1023, rather than the streamlined form 1023-EZ, will pay the higher cost.

Who is eligible for a 501(c)(3) short form? Nonprofit organizations with $50,000 or less in annual gross receipts, and $250,000 or less in assets, may use the IRS form 1023-EZ, a streamlined version of the standard form 1023 required by the IRS to apply for 501(c)(3) status. A streamlined application makes the process much easier and faster for smaller nonprofits that may not have the funds to hire an attorney, pay costly legal fees, and complete a complicated application. Even when using the short form, you'll need to supply additional information, such as your articles of incorporation or other founding documents.

How do I get a 501(c)(3) status in South Carolina? A nonprofit organization in South Carolina or any other state can obtain 501(c)(3) status by following the IRS 501(c)(3) application process. Note that this is a federal designation for tax exemption, and the 501(c)(3) application process is the same regardless of the state of legal formation. To get 501(c)(3) status in South Carolina, a nonprofit must have a federal EIN, articles of incorporation or other formation, supporting documents, financial data, and any additional information required. The nonprofit must then submit Form 1023 or Form 1023-EZ and wait for an IRS determination letter.

How do I get 501(c)(3) status in California? In California, nonprofits must complete the federal process and also fill out a separate application with the state of California for 501(c)(3) status in order to get state income tax liability exemption from the California Franchise Tax Board. This application is quite lengthy and complicated, and there is no short form even for nonprofits that qualify to use the federal form 1023-EZ. This makes getting 501(c)(3) status a little more complicated in California than in most other states.

No matter which state you formed your nonprofit in, you may check with the National Association of State Charity Officials (NASCO) to see if there are additional filing requirements in your state.