We can help you setup and maintain your non-profit organization's tax-exempt status by handling all the IRS reporting for you
Each year the IRS requires most tax-exempt organizations to submit the Form 990 and its relations, which includes the following items.
- Income Statement with very specific revenue and expense categories like donations, salaries, postage, rent…
- Balance Sheet with specific categories like cash, accounts receivable, accounts payable…
- Functional Expense Statement with all the expenses allocated to either program services, fundraising, or operations.
- Individual Program Expense Statement that reports all of the expenses for each program or service like seminar programs or educational mailings.
- Revenue Support Schedules that detail the organization’s sources of income in specific categories like charitable donations, membership fees, investment income.
The IRS uses these very specific revenue and expense classifications to determine if your organization will retain its tax-exempt status. So it’s imperative that you build your accounting system around these revenue and expense classifications.
Here's what we do for you...
- Review and compile your financial statements
- Design, install, and maintain your Accounting System
- Weekly, bi-weekly, or monthly payroll preparation
- Payroll Tax Preparation and Deposits
- Provide training for your accounting personnel
- Complete and file your non-profit status application
- Provide training for your board on non-profit financial statement usage and effective budgeting practices
- Prepare and file the 990 and 990T tax forms
- Prepare your initial start-up documentation, including incorporation, federal employee identification number (FEIN), and payroll setup with federal and state agencies.
- Churches: We prepare the pastoral housing allowance and other required benefit documentation to meet the complex dual status of ministers.
Here's what's needed...
- Articles of Incorporation containing the Exempt Purpose Statement as described in IRS Code section 501(c)(3) and defined in Treasury Regulation 1.501(c)(3)-1 Paragraph d and the Dissolution Statement described in Treasury Regulation 1.501(c)(3)-1 Paragraph b subparagraph 4 (“Organizational Test”).
- Employer Identification Number
- By-laws of the Organization
- Minutes of Board Meetings
- Names, Addresses, and Resumes of Board Members
- Names and addresses of all Active Members
- Inventory of Assets like cash, furniture, equipment, property, pledges…
- Inventory of Liabilities like mortgages, accounts payable, loans…
- Rent/Lease Agreements and Contracts
- Revenue and Expense Statements for the last four years or as far back as possible if your organization has been in existence for less than four years.
- Written Reason for Formation and History of the organization.
- Organization Mission Statement or Statement of Faith or Beliefs for Churches and other Religious Organizations.
- Organization Activities, Operations and Programs Documentation including your statement of purpose & operations, food programs, fundraisers, flyers/brochures/pamphlets…
- Financial Support Documentation including all sources of revenue like contributions, tithes, offerings, fundraisers…
- Fund Raising Program Descriptions
- IRS Processing/Filing Fee
We are happy to prepare any of these items if you need help.
What Is a 501(c)(3)
501(c)(3) – Charitable, educational, religious, literary, testing for public safety, promotion of amateur athletics, prevention of cruelty to children or animals
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
Actually, no! These terms are often used interchangeably, but 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-exemption is the result of a nonprofit organization being recognized by the IRS as being organized for any purpose allowable under 501(c)(3).
Being “501(c)(3)” 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.
For more information, see What is a 501(c)(3)?
How To Start a 501(c)(3)
The answer may not be what you expect. The initial corporate meeting is the essential first step in forming a nonprofit organization. It is at this meeting that the initial board of directors is installed and officer titles determined. The minutes (notes) of this meeting should include a resolution that shows unanimous affirmation by the initial board to establish the organization and pursue both incorporation and federal tax exemption. The purpose of the organization should be articulated in writing, as well.
The short answer is, “yes”. It is not necessary that you have every board position filled before paperwork is filed, but you need an initial board in place. In a nonprofit organization, it is the members of the board of directors who are legally accountable.
Probably. There are a number of tasks involved with forming a nonprofit organization at the state level. The most important of these is the incorporation process. While it is possible to form a non-corporate, nonprofit organization, (and obtain federal 501(c) tax exemption), the vast majority of organizations choose corporate status.
Forming a corporation means that the founders, or incorporators, are creating a legal entity that exists wholly apart from the people involved with it. Most people prefer to form a nonprofit corporation, in part, because of the liability protection a corporation provides. For example, if a nonprofit corporation were to be sued, the assets of its directors and members are generally protected because corporate assets are distinct from personal assets.
To obtain recognition as a 501(c)(3), tax-exempt entity, Form 1023 must be filed with the Internal Revenue Service. Form 1023 is a 29-page, comprehensive look at an organization’s structure and programs. Given the number of additional schedules, attachments and exhibits that may be required in addition to the application itself, most Form 1023 filings range between 50-100 pages of information.
Form 1023-EZ is a much more generalized document that does not require written budgets or narratives. Form 1023-EZ is specifically designed for certain, low-budget organizations.
Form 1023 is filed with the Exempt Organizations Division of the Internal Revenue Service in Cincinnati, Ohio, though it is now an electronic submission as of February 2020.
Form 1023-EZ is a much more generalized version of the standard Form 1023 long form. Form 1023-EZ is a more streamlined method of filing designed for smaller nonprofits seeking 501(c)(3) status. Because this form is e-filed, the time it usually takes to get IRS approval is greatly decreased. The 1023-EZ does not require written budgets or narratives with the application.
Not all purposes or activities qualify for this process. In addition, on-going gross revenue is limited to under $50,000. For more information, see our Form 1023-EZ info page.
Generally, Form 1023 should be filed within 15 months of the organization’s formation. For practical reasons, many organizations find it better to apply as soon as possible following formation. Extensions beyond 15 months may be possible under a variety of circumstances. After a period exceeding 27 months following corporate formation, retroactivity of 501(c)(3) status is likely limited.
Yes, but it is not recommended. The IRS will allow unincorporated associations to apply, but these organizations will not have the inherent benefits associated with the corporate structure. In addition, the IRS will still require copies of an organizing document…and will subject the organization to corporate requirements regardless.
The IRS has a two-tiered filing fee structure. Organizations filing the standard Form 1023 pay a $600 filing fee when sending their application to the IRS. Organizations filing Form 1023-EZ pay a reduced $275 filing fee.
Technically, anyone can complete Form 1023. From a practical standpoint, it is usually advisable to enlist the help of a professional who specializes in the process, such as The Foundation Group. While the IRS rejects slightly less than 10% of applications filed, nearly half are abandoned by the filer…usually out of frustration or inability to answer tough, IRS follow-up questions. Out of approximately 80,000 applications filed annually, only half make it through the process.
Will my personal tax or financial situation have any bearing on my nonprofit receiving 501(c)(3) status?
No. There is no direct correlation between the organization and the financial, tax or credit status of any officer, director or employee.
As stated in another answer, IRS Form 1023 is 29 pages long, plus required schedules and attachments. While every organization does not have to complete every page, a typical application package is between 50-100 pages of material. More important, however, is the amount of time required to complete the package. The IRS estimates a preparation time of well over 100 hours for a novice to prepare Form 1023.
Form 1023-EZ reduces that estimated time because the application is significantly shorter.
Falls Credit N Tax prepares Form 1023 on behalf of its clients. Click here to learn more.
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 three-year projected budget (new organizations) or up to five 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.
The information requested on a Form 1023-EZ relates to more generalized questions of structure and compliance. No written budgets or narratives are required.
Both Form 1023 and 1023-EZ must be submitted online via the pay.gov IRS portal.
Form 1023 does not need to be notorized, but it must be signed, under penalty of perjury, by an officer or director.
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. Signed minutes from an initial organizing meeting of the board of directors may be sufficient. 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.
The bigger issue here is state compliance concerns. Most states require nonprofits to register with that state’s Division of Charities (or similar department) prior to any fundraising activities.
Yes, but don’t expect much success with that. Most foundations, government agencies and other potential sources of funding will require an organization to possess an approved IRS 501(c)(3) determination letter.
No. Your EIN is the only number issued to your organization by the federal government. When your nonprofit’s 501(c)(3) status is approved by the IRS, you will receive a written notice, known as a letter of determination.
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 an enormous undertaking absolutely requiring professional representation. 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. All the more reason to consider acquiring competent assistance at the beginning of the process.
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.
In most states, no. 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.
Organizations filing Form 1023-EZ are also required to file the entirety of the separate application to the California Franchise Tax Board.