The process for receiving 501(c)(3) approval from the Internal Revenue Service (IRS) can be long and tedious. It can take 90 to 180 days just to receive notification that the IRS received the application and is reviewing it, and several more months after that to receive the official approval letter.
That’s a long time to wait to start receiving donations or telling donors that their donations are potentially tax-deductible. But even though your nonprofit hasn’t yet received approval, you can still solicit and accept donations, with some caveats.
An IRS grant of 501(c)(3) status is usually retroactive, which means that the approval may begin from a date earlier than when your application is approved, such as when your nonprofit was legally formed.
In order for this to apply, your nonprofit must submit its application for 501(c)(3) status to the IRS within 27 months of incorporation. If your nonprofit meets this criteria, then it can solicit and accept donations prior to getting 501(c)(3) approval.
If your nonprofit chooses to accept donations prior to 501(c)(3) approval, it should inform every prospective donor prior to the donation being made, and also send a formal letter to each donor after the donation is made.
In addition to thanking the donor for the donation and explaining how the funds will be used, this letter should advise the donor that:
Using a formal letter will help keep you out of trouble with the IRS and with your donors. Below is a sample letter that you can tailor to your nonprofit’s needs.
We would like to say thank you for your recent donation! With your help, we will be able to [fill in what you plan to do with the donation, for example, help provide school supplies to children in need]. Our mission is to [for example, ensure that no child attends school without the necessary supplies]. We are so glad that you share in this mission with us.
While we appreciate your generous donation, we must inform you that [your nonprofit’s name] has not yet received 501(c)(3) approval. Our application is pending with the IRS and we expect approval to be forthcoming within [suggest dates based on when you submitted your application, for example, within the next six months]. Because the IRS has not yet approved our application, your donation is not tax deductible at this time. However, once the IRS approves our application, your donation should be tax deductible retroactively. We suggest that you speak with a tax adviser on this issue.
While there is a risk that our application for tax-exempt status will not be approved, we feel confident in the materials we submitted and in our mission. We have included a brochure so as to provide you with more information on what we do.
We will notify you as soon as we have received 501(c)(3) approval from the IRS.
Thank you again for your donation. Everything we do is possible because of people like you!
Of course, having promised that you will notify donors of the IRS’s eventual decision on your 501(c)(3) status, you must be sure to follow through on this. This will be your nonprofit’s first exercise in the careful donor record-keeping that is essential for successfully running a nonprofit.