Receiving tax-exempt 501(c)(3) status from the IRS is one of the most important steps in starting your nonprofit organization.
Official recognition as a nonprofit not only means tax exemption, it also allows your donors to deduct any contributions they make to your cause. This will become a major marketing point as your organization grows and attracts larger donations.
Applying for and receiving 501(c)(3) tax exempt status as soon as possible is essential for ensuring your nonprofit’s sustainability.
If you’ve been researching the process of starting a nonprofit, you know that this is an important early step. There are some tasks you should complete prior to starting the application, like solidifying your mission, building your leadership team, and preparing your bylaws, that will make the actual application process go much smoother.
Once you’re ready to begin your 501(c)(3) application, though, there are some essential steps and tips you should follow:
The 501(c)(3) application process seems overwhelming to many new nonprofits, but there are plenty of smart steps you can take to ease any stress! Preparing in advance and breaking the process down into more actionable steps goes a long way to simplify the process.
Filing articles of nonprofit incorporation is an essential prerequisite of beginning the 501(c)(3) application process.
Also called a charter, articles of incorporation officially establish your nonprofit as a legal entity that can conduct business, accept donations, and receive tax-exempt status.
Articles of incorporation for both businesses and nonprofits are typically submitted to your state’s secretary of state office, but be sure to research exactly how this should be done in your state.
Your nonprofit can incorporate in one of several different forms, depending on your organization’s structure and purpose. These include establishing your organization as:
Legally, your nonprofit will exist as a nonprofit corporation prior to receiving its 501(c)(3) tax-exempt status, after which it will exist as a 501(c)(3) nonprofit organization.
The incorporation process is simple and usually takes very little time. The articles themselves require some minimal information about your organization’s name, location, and board members. Check out this IRS template for an example.
After incorporating your nonprofit as a legal entity with your state, you’ll need to request recognition at the federal level.
This is a short and simple step, but your nonprofit’s employer identification number, or EIN, is required in order to continue with the 501(c)(3) application process.
There are only 2 requirements for receiving an EIN: Your organization needs to have been incorporated in a US state or territory, and the individual requesting the EIN needs to have valid taxpayer identification, like a social security number. That’s it!
You should receive your employer identification immediately upon submitting the request, and then it’s time to focus on the IRS Form 1023.
Form 1023 is the heart of the 501(c)(3) application process and requires that multiple components be submitted along with it, including:
This step is important because it can affect exactly which forms you’ll need to complete to apply for tax exemption and nonprofit recognition.
This also differs from the first tip listed above, filing for articles of incorporation. If you’ve established your organization as a nonprofit corporation and are ready to begin applying for 501(c)(3) status, you need to make sure that you focus your efforts on the correct application process for what you’re trying to accomplish. You might even need a different type of exemption in the federal tax code altogether.
The two main types of nonprofits that are differentiated in the tax exemption application process are public charities and private foundations, both of which receive 501(c)(3) status through Form 1023. All organizations that qualify for tax exemption are technically considered private foundations unless they:
Additionally, there are other types of nonprofits that fall somewhere between these two categories and require slightly different application processes. They include:
Preparing some concrete plans and structures well in advance of even beginning your 501(c)(3) application will be extremely helpful in the long run.
These materials are all required when submitting your completed Form 1023. The IRS uses them to judge the soundness of your governing and financial structures as well as your guiding mission and sustainability.
You’ve more than likely already prepared these materials in the process of starting your nonprofit, but make sure that they’re as complete and comprehensive as possible as you begin your 501(c)(3) application. Focus on these areas:
Staying organized and prepared to present your nonprofit’s plans is an excellent practice to maintain, especially at this early stage.
Ideally, your nonprofit will be submitting grant proposals for initial funding around the same time as you’re applying for 501(c)(3) status; developing and drafting documents that cover all the information above is a perfect way to streamline multiple processes at once!
If this process sounds daunting, that may be an indication it’s time to recruit a nonprofit consultant to guide the way. Nonprofit consultants are professionals who work with 501(c)(3) organizations to help them align their strategy and implement sustainable operations.
There’s no better time to find the right nonprofit consultant to partner with than in these early preparation stages. They can help your team ensure your paperwork is in order, teach you what you need to know to successfully complete the 501(c)(3) application process, and identify any errors or potential problems with your nonprofit’s initial fundraising plans.
Not only that, but since consultants generally work with a diverse range of nonprofit organizations, they can offer insight into what challenges nonprofits like yours often face, especially when it comes to navigating bureaucratic processes like registering as a 501(c)(3).
One of the very first steps you should have already completed when starting your nonprofit is developing a strong mission statement.
A great mission statement will contain and convey the essence of your nonprofit, its motivations, and its guiding principles. It should convey your nonprofit’s goals in a concrete way. Most of all, it should be defensible, not completely abstract.
Sounds like a lot for one or two sentences to accomplish, but developing a strong mission statement is a perfect investment in your nonprofit’s ability to attract attention and support. More importantly, having a clear vision goes a long way to legitimize your work to the outside world.
Fully understanding your nonprofit’s guiding purpose will make your cases for both support and tax exemption strong and defensible. Take the time to write out the following and reflect on them:
Thinking through every aspect of your operations and purpose will also help you to identify any problem areas that might derail your 501(c)(3) application.
For example, any apparent conflict of interest between your mission, governing structures, programming, or financial plans will result in immediate denial of tax exempt status!
Prepare early for your 501(c)(3) application so that you can take your time completing it. That way, you and your team can catch any possible issues and resolve them before finalizing your application.
During or after completing your 501(c)(3) application, it’s very important that you take the time to research any state-specific requirements you’ll need to be aware of as you finish officially starting your nonprofit organization.
Most importantly, look up your state’s requirements for charitable solicitations registration. If required, you can complete this registration with either the office of your state’s attorney general or secretary of state.
These requirements vary by state. 40 currently require separate registration in order to legally solicit donations. Soliciting donations is probably the single most important element of a nonprofit organization’s operations, so you can’t afford to discover these requirements until you’ve already received tax-exempt status!
In addition, research any other specific requirements in your state for finalizing your nonprofit’s status as a legally tax-exempt organization. These might apply to any step in the entire 501(c)(3) process, so do your research early. They might include variations in the incorporation process and differing sales tax exemption applications.
Plus, since each state’s tax code is different, there are varying levels of state overlap with federal 501(c)(3) status. Look up your state’s current policies. Depending on where your nonprofit is based, you might need to do any of the following to receive state tax exemption:
Some states will automatically recognize total tax exemption once your 501(c)(3) status is granted, while other states have no corporate taxes at all, eliminating the need for tax exemption at that level!
Always remember that even once you complete and submit your 501(c)(3) application to the IRS, it can still take quite a long time to finally receive tax-exempt status.
Approval of your 501(c)(3) application might be delayed for any number of reasons, including:
This means it’s essential that your nonprofit understands its position and tax obligations in the meantime.
The IRS has policies in place to address the needs of nonprofit organizations waiting for granted tax exemption, so be sure to familiarize your team with these special obligations and financial reporting protocols you’ll need to follow.
Comply with all applicable tax codes while you wait!
In the meantime, go ahead and get to work. Interim tax policies for nonprofit corporations exist so that they don’t need to wait to begin pursuing their missions, gathering fundraising tools, and planning engagement events.
Building an early network of support is essential to sustaining your nonprofit through its first several years. Waiting too long to get started engaging your stakeholders is a completely unnecessary hindrance for your new nonprofit!
You already know that applying for and receiving 501(c)(3) tax-exempt status is essential to founding a sustainable nonprofit organization.
Never feel intimidated by the application process, though! By following some key tips, preparing ahead of time, and understanding what the entire process entails, your nonprofit can streamline the experience.
For more information and tips for getting your new nonprofit organization up on its feet, check out these additional resources that you might find helpful:
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