There is no doubt that your nonprofit is ready to experience the highs of seeing your work impact lives and change the community for the better, but along with those moments come the gritty details and the tedium of running a legitimate organization.
One of the most important parts of that is ensuring your tax-exempt status, which can be substantial in moving your efforts forward. We’re here to provide a simple and comprehensive list of how to file for that status. There will be plenty of little details, but it doesn’t have to be a painful process!
Outline Your Purpose
There are several types of nonprofits that are eligible for tax-exemption under section 501(c)(3) of the Internal Revenue Code. These include charitable corporations, private foundations, and even political organizations. In order to secure your tax exemption, your nonprofit will need a clear mission statement. When it comes time to file your forms, this statement will be the foundation of your case for tax-exemption. Here are some guidelines for what the Internal Revenue Service considers to be charitable organizations.
In essence, your organization must prove to be not-for-profit. Disqualifying factors include engagement in excess-benefit transactions, assets that inure to the benefit of any individual shareholder or member, and working towards the furthering of private interest. As long as your nonprofit does not operate in these ways, you should be able to confidently move forward.
The next step of the process is to file for corporation status within your state. This involves a list of tasks that is broad but not daunting. If you have already achieved status as a corporation, feel free to skim past this step.
- Choose a name: make sure your corporation’s name is unique and within the standards of your state.
- Appoint directors: this one is simple. Name the primary administrators of your corporation.
- File articles of corporation: there will be a fee for this that ranges widely from state to state. This is where you will need to provide your name and address, list of directors, and contact information for the agent handling the forms.
- Create bylaws: your corporate bylaws will dictate rules and rights for every member of your corporation, from directors to participants. There are a host of resources for drafting these, so you won’t have to start from scratch!
- Hold your first meeting and record the minutes: bring your directors together, commence your initial meeting, and keep a record of everything said and done. Minutes are essential to legitimizing corporate decisions and appointments.
- Acquire an EID: this stands for Employer identification number, and is in essence the Social Security Number for your corporation. You’ll need it to file taxes, open a company bank account, and to file for several types of licenses and loans. When applying, you will name a responsible party: this will be the individual who is your corporation’s primary contact with the IRS.
- Obtain appropriate permits and licenses: depending on your state, you may need to apply for several different permits and licenses to operate.
If at any point in these steps you are unsure of how to fill in a form or move forward, don’t be afraid to contact professionals for advice. Proper completion of your corporate status is vital.
File an Exemption Under Section 501(c)(3)
Once you have legitimized your corporation and have all of your documents, you will be able to begin the filing process with the IRS. First, you will need to make an account at Pay.gov. This will allow you to complete your 1023 application. The user fee for this is $600, paid through the website. You may want to check your eligibility for a 1023-EZ instead, which is a more streamlined version of the form. The 1023-EZ fee is $275.
Before you begin the application, compile all of your documents (articles of corporation, constitution, and bylaws) into a single PDF. This must also include your EIN. If you have filed form 2848 (to declare power of attorney and appoint a legal representative) and/or form 8821 (authorization of an individual or outside party to review your tax information) you must include these as well (note: your PDF may not exceed 15MB. If it does, remove the items that exceed the limit and contact the IRS by phone about how to submit them). The application will request this PDF at the end.
Once you submit your 1023 application, expect to be contacted within 180 days. If more than 180 days pass, you may wish to contact the IRS. If you do, keep your IEN on hand and make sure you are authorized as a director of the corporation or have power of attorney.
You will certainly be anxious to hear back about your status, but as long as you file within 270 months of your legal formation date and are approved, your nonprofit will be retroactively granted tax-exemption status from that date.
Once you are officially tax-exempt under Section 501(c)(3), you will remain so as long as you continue to operate exclusively for exempt purposes. This means that you don’t have to worry about applying for that 1023 again! However, you will still need to keep careful track of your operations and accounts. Be sure to file annual returns and know what your nonprofit’s public disclosure requirements are.
Dealing with the IRS can feel overwhelming, but once you’re under 501(c)(3), it will be absolutely worth it. Don’t forget to ask for professional help when you need it, and good luck!