Even after you've incorporated, obtaining federal tax-exempt status is a critical step in forming a nonprofit organization. Most of the real benefits of being a nonprofit flow from your 501(c)(3) tax-exempt status, such as the tax-deductibility of donations, access to grant money, and income and property tax exemptions. (For general information on forming a nonprofit corporation, read Nolo's article How to Form a 501(c)(3) Nonprofit Corporation.)
To apply for tax-exempt status, you must complete IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Completing this form can be a daunting task because of the legal and tax technicalities you'll need to understand. We can't give you complete instructions on how to complete the form in this article because it is so complicated; for that, get How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo). Here, we provide an overview of the form so you can familiarize yourself with the type of questions you'll be asked to address.
When to File For 501(c)(3) Status
To get the most out of your tax-exempt status, you'll want to file your Form 1023 within 27 months of the date you file your nonprofit articles of incorporation. (For more information on articles of incorporation, read Nolo's article Nonprofit Formation Documents: Articles of Incorporation, Bylaws, and Organizational Minutes.) If you file within this time period, your nonprofit's tax exemption takes effect on the date you filed your articles of incorporation (and all donations received from the point of incorporation onward will be tax deductible). If you file later than this and can't show "reasonable cause" for your delay (that is, convince the IRS that your tardiness was understandable and excusable), your group's tax-exempt status will begin as of the postmark date on its IRS Form 1023 application.
How to Prepare Your Tax Exemption Application
Now let's take a look at the Form 1023. It's divided into 11 parts, with each part covering certain information.
Identification of Applicant
This section tells the IRS about your organization. It asks for basic information like the name of your nonprofit corporation, contact information, and when you filed your articles of incorporation.
Your nonprofit must have a federal employer identification number (EIN) prior to applying for 501(c)(3) tax exemption, even if it doesn't have employees. This can be done quickly and easily. Even if your organization held an EIN prior to incorporation, you must obtain a new one for the nonprofit corporate entity. For information on how to apply for an EIN, including information about applying online, visit the IRS website at www.irs.gov.
This section requires that you attach a copy of your articles of incorporation and your bylaws to the application form. (Most nonprofits seeking 501(c)(3) status are corporations. If your entity is an LLC, unincorporated association, or nonprofit trust, you should seek the help of a lawyer with experience in nonprofit tax law to complete your Form 1023 application.)
Required Provisions in Your Organizing Document
There are certain clauses that you must have in your articles of incorporation in order to get your 501(c)(3) exemption:
- a clause stating that your corporation was formed for a recognized 501(c)(3) tax-exempt purpose (e.g., charitable, religious, scientific, literary, and/or educational), and
- a clause stating that that any assets of the nonprofit that remain after the entity dissolves will be distributed to another 501(c)(3) tax-exempt nonprofit -- or to a federal, state, or local government for a public purpose.
In this section, you state where these clauses can be found in your articles (by page, article, and paragraph).
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