Frequently Asked 501(c)(3) Questions
What is a 501(c)(3)?
Section 501(c)(3) is the portion of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations, while allowing donors to these charitable organizations to take a tax deduction on their Federal income tax returns for their donations. Being “501(c)(3)” in most cases means that a particular nonprofit organization has been approved by the Internal Revenue Service as a tax-exempt, charitable organization. “Charitable” is broadly defined as being established for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children.
Who Can Get 501(c)(3) status?
Entities that can seek 501(c)(3) determination from the IRS include corporations, trusts, community chests, and unincorporated associations. The overwhelming majority of 501(c)(3) organizations are nonprofit corporations formed for charitable purposes.
Does “nonprofit” “501(c)(3)” and “tax exempt” all mean the same thing?
Although these terms are often used interchangeably, they all mean different things.
“Nonprofit” means the entity, usually a corporation, is organized for a nonprofit purpose.
“501(c)(3)” means a nonprofit organization that has been recognized by the IRS as being tax-exempt by virtue of its charitable programs.
“Tax-exempt” status is the result of a nonprofit organization being recognized by the IRS as being organized for any purpose allowable under 501(c)(3) – 501(c)(27).
What’s So Special About a 501(c)(3)?
One of the primary benefits of being tax-exempt under IRC Section 501(c)(3) is the ability to accept contributions and donations that are tax-deductible to the donor. Additional benefits include, but are not limited to:
* Exemption from federal and/or state corporate income taxes
* Possible exemption from state sales and property taxes (varies by state)
* Ability to apply for grants and other public or private allocations available only to IRS-recognized, 501(c)(3) organizations
* Potentially higher thresholds before incurring federal and/or state unemployment tax liabilities
* The public legitimacy of IRS recognition
* Discounts on US Postal bulk-mail rates and other services.
Other unique provisions tend to vary by state. Like federal law, most states allow for deductibility for state income tax purposes. Also, many states allow 501(c)(3) organizations to be exempt from sales tax on purchases, as well as exemption from property taxes. Special nonprofit, bulk rate postage discounts are available from the Post Office to qualifying organizations.
Types of 501(c)(3) Organizations
501(c)(3) organizations fall into one of three primary categories: public charities, private foundations, and private operating foundations.
Most 501(c)(3) organizations are classified as “Public Charities.” A public charity is generally defined by the IRS as “not a private foundation.” To qualify as a public charity, an organization must receive a substantial portion of its revenue from the general public or from government. In order to remain a public charity (and not a private foundation), a 501(c)(3) must obtain at least 1/3 of its donated revenue from a fairly broad base of public support.
Public support can be from individuals, companies and/or other public charities. Donations to public charities can be tax deductible to the individual donor with certain limitation based on the donor’s income. In addition, public charities must maintain a governing body that is mostly made up of “unrelated” (generally by birth, marriage or business relationship) individuals. Public charities are what most people recognize as those organizations with active programs. Examples include churches, benevolence organizations, animal rescue organizations, educational organizations, etc.
A private foundation is often referred to as a non-operating foundation, as in it typically does not have active programs. Revenue may come from a relatively small number of donors, even single donors. Private foundations are usually thought of as nonprofits which support the work of public charities through grants, though that is not always the case. Donations to private foundations can be tax deductible to the individual donor , but there are limits to how much of the contribution can be deductible. Governance of a private foundation can be much more closely held than in a public charity. A family foundation is an example of a private foundation.
The third category is the least common: private operating foundation. These organizations often maintain active programs similar to public charities, but may have attributes (such as close governance) similar to a foundation. As such, private operating foundations are often considered hybrids. Most of the earnings must go to the conduct of programs. Donation deductibility is similar to a public charity.
Are There Any Restrictions on My Activities?
501(c)(3) organizations are highly regulated entities, and must comply with a number of Federal guidelines. Strict rules apply to both the activities and the governance of these organizations. No part of the activities or the net earnings can unfairly benefit any director, officer, or any private individual, and no officer or private individual can share in the distribution of any of the corporate assets in the event the organization shuts down.
Further, lobbying, propaganda or other legislative activity must be kept relatively insubstantial. Intervention in political campaigns or the endorsement/anti-endorsement of candidates for public office is strictly prohibited.
How Can I Obtain 501(c)(3) Status?
The simple answer is CALL US! In order for a corporation or other qualifying entity to receive 501(c)(3) status, it must apply to the IRS for recognition of tax-exempt status by filing Form 1023, Application for Recognition of Tax Exemption. The application is a thorough examination of the organization’s structure, governance and programs. Additionally, in many States a separate Exemption Application is required to be filed in order for the organization to be exempt from State income tax. These requirements vary by State, but they must be observed.
In order for the IRS to make a determination on a standard Form 1023 application, specific questions must be answered relative to the organization’s legal structure, its governing board and potential conflicts of interest. More importantly, pages of detailed questions concerning the organization’s activities must be answered. This is in addition to a two-year budget (new organizations) or three years of financial history (existing organizations) and a written narrative essay outlining the organization’s programs, both current and planned, that will advance the organization’s exempt purpose. Add to that copies of supporting schedules and documentation and you have a basic application package.
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What services does 501(c)(3)4u offer to help me become tax-exempt?
We offer the most comprehensive 501(c)(3) exempt application package available, all for one FLAT FEE! Unlike other companies who prepare these type of applications, we do it all! Our 501(c)(3)4u standard 501(c)(3) Exemption Application package includes:
* Draft and file Articles of Incorporation with your State
* Draft Bylaws
* Draft IRS Form 1023 (or 1023-EZ) and all schedules, attachments and statements required by the IRS.
* Draft State exemption application (if required)
* Obtain IRS Tax Identification Number
* Provide template (fill-in) for the first Meeting of the Board of Directors
* Provide Corporate Resolution for opening your bank accounts
* Prepare responses to any IRS request for additional information or clarification of any aspect of your 501(c)(3) application.
* We are not finished until you have your 501(c)(3) tax-exempt status approved by the IRS – period.
What about State tax exemption?
Many States accept your IRS approval of tax-exempt status under 501(c)(3) as sufficient to provide exemption from State income taxes, if any. While a handful of states have a simple, one- or two-page form that must be prepared, California is the only state that requires a separate application process rivaling the one required by the IRS. In California, federal tax-exemption does not eliminate State income tax liability until approval is received from the California Franchise Tax Board.
All 501(c)(3)4u 501(c)(3) formation clients located in California receive assistance with the Franchise Tax Board process along with their IRS Exemption Application, all for the same low, flat fee and guaranteed results.
What are the IRS fees to file for 501(c)(3) status?
The IRS has a two-tiered filing fee structure. Most organizations pay the standard $850 filing fee when sending their application to the IRS. However, a reduced filing fee is offered to new organizations that are projected to have no more than $10,000 in annual gross revenue for the coming 3 years (or existing organizations having less than $10,000 annual gross revenues for the preceding 2 years.) These organizations can pay a reduced filing fee of $400. Most start-up nonprofits will fall into this category.
Remember, however, that the realities of obtaining donations from the public often result in significantly less revenue during the “start-up” years than the founders would like. Keep this in mind when doing your annual budget forecasts, and be conservative in your revenue projections.
Organizations filing Form 1023-EZ pay the reduced $400 filing fee.
How long does it take to obtain 501(c)(3) status?
Typically, IRS 501(c)(3) approval takes between 2 and 12 months, inclusive of likely written follow-up questions. Sometimes it takes a little less; sometimes a little more. Expedited review can be requested if a new organization is being formed to provide immediate disaster relief or if a promised grant is both 1) substantial relative to the organization’s budget and 2) the grant has a specifically- defined expiration date. There is no guarantee the IRS will grant expedited review requests.
One of the primary reasons for the long review period is the amount of time it takes for a particular case to assigned to a review agent. Depending upon the volume of applications being received by the IRS at any given time, we’ve seen “inventory” periods be as short as 30 days and as long as 8 months.
Does my personal tax or financial situation have any impact on my nonprofit organization obtaining 501(c)(3) exempt status?
No. There is no direct correlation between the organization and the financial, tax or credit status of any officer, director or employee.
Can I start receiving donations before my organization’s 501(c)(3) exempt status is approved?
Generally, yes. IRS 501(c)(3) recognition is (usually) effective retroactively to the earlier of 1) the organization’s legal formation or 2) the commencement of its programs. This means that the organization’s activities are retroactively tax-exempt and donations are retroactively tax-deductible to the donor, extending even to prior tax years.
In order for the program-commencement date to be considered the effective date of tax-exemption, however, there must be an organizing document of some kind, typically your Articles of Incorporation. Under certain circumstances, IRS tax-exemption may only be retroactive to the date of the filing of Form 1023. This is particularly true for organizations formed more than 27 months prior to applying for 501(c)(3) status.
Can I apply for grants before my organization’s 501(c)(3) exempt status is approved
Yes, but don’t expect much success with that. Most foundations, government agencies, corporations. philanthropic organizations and other potential sources of significant funding will require an organization to possess an approved IRS 501(c)(3) determination letter before they will consider donating to your organization.
What happens if my nonprofit’s application for exemption under 501(c)(3) is denied?
In many cases, once the application for 501(c)(3) status has been reviewed by the IRS, there may be a need to provide them additional information about the organization’s structure, charitable purpose or proposed activities. This is not unusual, and 501(c)(3)4u will assist you in providing this additional information to the IRS, if necessary, for NO ADDITIONAL CHARGE.
On the other hand, a denial by the IRS of 501(c)(3) status, known as an adverse determination, is a very difficult situation. An adverse determination can be appealed, but it is a enormous undertaking absolutely requiring professional assistance. Alternatively, the organization may choose to apply again from scratch. In either case, it is usually an uphill battle to acquire 501(c)(3) recognition once an organization’s initial application has been rejected. This is a compelling reason to consider acquiring competent assistance at the beginning of the process.
Remember, 501(c)(3)4u has a 100% success rate in the 501(c)(3) applications we have prepared and submitted. Over 200 nonprofits have obtained their exempt status using our services, and we offer a 100% MONEY BACK GUARANTEE! If we are unable to obtain your exempt status for your organization, we will refund 100% of our fees (not including IRS and state filing fees.)
Once I receive 501(c)(3) exempt status, is my charitable organization exempt from all taxes?
Probably not. Private foundations may still be subject to taxes on investment earnings and undistributed minimum grant allocations. All 501(c)(3) organizations may be subject to taxes on “unrelated business income.” 501(c)(3) organizations that have employees are subject to federal and state payroll taxes. Additionally, some states do not exempt 501(c)(3) organizations from sales and/or property taxes. It is important for the organization to know what is required in its state and locality.
How do I get started?
Just contact US here at 501(c)(3)4u. We have the knowledge, expertise and experience to get the job done right the first time! Simply complete the brief inquiry form found on our Home Page and I will be glad to contact you either via email or phone, whichever you prefer. If you have already made the decision to obtain your 501(c)(3) exempt status, you can complete the Nonprofit Worksheet found on our “List of Services” page and send that to us.