A few types of nonprofits are in the unique (and enviable) position of being able to qualify as tax-exempt Section 501(c)(3) charitable organizations without applying to the IRS. These include:
- very small nonprofits with annual gross receipts under $5,000, and
- churches and integrated auxiliaries of churches and conventions or associations of churches.
Donations to these organizations are tax deductible even though the nonprofit never applied for, or obtained, a determination letter from the IRS. This is a huge benefit for your group because qualifying with the IRS normally involves filing a complicated tax exemption application form (Form 1023), paying filing fees, and waiting for the IRS to issue you a determination letter. (To learn more, see Nolo's article How to Obtain 501(c)(3) Tax-Exempt Status for Your Nonprofit.)
Your nonprofit does not need to file Form 1023 with the IRS if its annual gross receipts are normally less than $5,000. "Gross receipts" means the total amount of income your nonprofit receives from all sources during its annual accounting period, without subtracting any costs or expenses.
A nonprofit does not need to have less than $5,000 in gross receipts every year to pass this test. It can earn more in some years and still qualify. For purposes of the test, an organization normally does not have more than $5,000 in annual gross receipts if:
- during its first tax year it received gross receipts of $7,500 or less
- during its first two years it received a total of $12,000 or less in gross receipts, and
- if it is in existence for at least three years, it received $15,000 or less in gross receipts during the immediately preceding two years plus the current year.
If your nonprofit starts to grow and no longer passes the gross receipts test, it must file Form 1023 within 90 days of the end of the year in which it exceeded the threshold. If you do so, your nonprofit will be recognized by the IRS as a Section 501(c)(3) tax exempt organization from the date of its creation. A nonprofit that files an application after the deadline may be recognized as tax exempt from the date of the application; it may also request exemption retroactive as of the date of creation.
No matter how large their income, churches are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. "Churches" includes synagogues, temples, mosques, and similar types of organizations. Other religious organizations that do not carry out the functions of a church, such as mission organizations, speakers’ organizations, nondenominational ministries, ecumenical organizations, or faith-based social agencies must apply for exemption from the IRS. See Publication 1828, Tax Guide for Churches and Religious Organizations, for more details .
Should You Apply for Exempt Status Anyway?
Many churches and mini-nonprofits apply for Section 501(c)(3) exempt status from the IRS even though they are not required to do so. A favorable determination letter from the IRS assures prospective contributors that their contributions will be tax deductible. Moreover, many institutional funders will only fund nonprofits with an IRS determination letter.
IRS Rules Still Apply
All the rules applicable to nonprofits that are formally recognized as 501(c)(3) organizations by the IRS also apply to mini-nonprofits and churches. Among other things, this means that:
- the nonprofit's net earnings may not inure to the benefit of any private individual or shareholder
- no substantial part of the nonprofit's activity may be attempting to influence legislation
- the nonprofit may not intervene in political campaigns, and
- the organization’s purposes and activities may not be illegal or violate fundamental public policy.
For more information on nonprofits and taxes, pick up Nolo's Every Nonprofit's Tax Guide by Stephen Fishman, J.D.