Nonprofit Organizations: Obtaining and Maintaining 501(c)(3) Tax-Exempt Status
Most nonprofit organizations are established for charitable purposes pursuant to Section 501(c)(3) of the Internal Revenue Code. After you have incorporated your nonprofit organization, obtaining federal tax-exempt status is a critical next step in forming a nonprofit organization. Obtaining tax-exempt status comes with significant benefits, including paying no federal, state or local income tax, receiving donations, qualifying for special grants and government funding, and potentially entitling the entity to special rates for services, including postage and mail delivery. Obtaining 501(c)(3) status is significant, but maintaining 501(c)(3) status is no easy task. This article explains how to obtain and maintain 501(c)(3) tax-exempt status.
Obtaining Tax-Exempt StatusTo apply for tax-exempt status, you must complete IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Completing this form can be a complicated and daunting task because of the legal and tax complexities that must be understood. 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 you can complete online.
You should file Form 1023 within 27 months of the date you file your nonprofit Articles of Incorporation. If you file within this time period, your nonprofit’s tax exemption takes effect on the date you filed your Articles of Incorporation. This is important because all donations received from the date of incorporation on are now tax deductible. If you file Form 1023 more than 27 months after incorporating without “reasonable cause” for the delay, the tax-exempt status will begin as of the postmark date on the IRS Form 1023. Most organizations pay the standard $850 filing fee when sending their application to the IRS; however, organizations that expect to have (or have had) no more than $40,000 in gross revenue for the first four years combined can pay a reduced filing fee of $400.
Maintaining Tax-Exempt StatusOnce your organization receives its tax-exempt status, there are important steps the organization must take to retain that status. Most tax-exempt nonprofits are required to file annual information returns with the IRS. The nonprofit will file either a Form 990, 990-EZ, or 990-N, depending on its gross receipts and total assets. A few organizations, however, such as churches, do not have a filing requirement. If your nonprofit is required to file an information return and fails to do so for three years in a row, the IRS will revoke the nonprofit’s tax exempt status.
If you are soliciting contributions and donations from individuals, the nonprofit must provide a written receipt, and register and file annual reports with the state in which it is incorporated. A donor should be given a written acknowledgement of any gift of more than $250 in order to take a tax deduction. Your nonprofit must also provide documentation that identifies the fair market value of any goods and services donated. Additionally, to maintain tax-exempt status, the organization’s activities must serve the public and not private interests, avoid engaging in substantial lobbying, and refrain from all political campaign activity.
This article is a brief overview of how to go about obtaining and maintaining your nonprofit’s tax-exempt status, which can be time-consuming and difficult at times. The applicable IRS forms are lengthy and complex, and there are a number of other pitfalls along the way. If you encounter any issues along the way, find a tax lawyer by quickly posting a short summary of your legal needs on www.legalserviceslink.com, and let the perfect attorney come to you!
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