What You Need to Know About the Application for 501(c)(3) Tax-Exempt Status

Obtaining 501(c)(3) tax-exempt status can be an intimidating process for new nonprofit organizations. Applying for this status is a complex but crucial step in the formation of your organization. There are many pitfalls, so it’s important to be aware of a few key things as you embark on this journey.

Stack of binders filled with paper forms.

When should I file?

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, should be filed within 27 months from the end of the month in which your organization is formed. For example, if your organization is formed in July 2017, you should file no later than October 31, 2019. Filing within this time period allows your tax-exempt status to take effect on the date of incorporation. That means all donations received since the date of incorporation onward are tax deductible. If you miss this this 27-month period, and you can't show reasonable cause for the delay, your tax-exempt status won’t begin until the postmark date of the Form 1023 application. Any donations received prior to the application date would not be tax-deductible.

How should I file?

The current version of the Form 1023 is divided into 11 parts and is quite complex. Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This is a shorter, simpler application form that can be completed online. Review the instructions for Form 1023-EZ to determine if your nonprofit meets the requirements. Both the Form 1023 and 1023-EZ require a submission fee. These fees vary depending on which form you use and the amount of your annual gross receipts.

What if something goes wrong?

It is not unusual for the IRS to request further information after the initial submission, often due to an error in the application. Missing policy documents or too-short financial projections are common errors. You will usually have an opportunity to correct your error, as long as an adverse determination was not initially made. We suggest consulting with an attorney if this roadblock is unclear in any way, so as to avoid further issues.

What else do I need to know?

If your intent is to form a 501(c)(3) charitable organization - not a private foundation - be very clear in disclosing the public interest you will serve. If the IRS grants you private foundation status instead, there is a 60-month determination period to revert to a public charity. This can be a major headache for public charities. Slow down and pay close attention to this part of the Form 1023, or you might regret it later.