How to Apply for 501(c)(3) Tax-Exemption Status

If you’re thinking of starting a nonprofit — whether to do charitable work, to bring the arts to your community or to care for local assets like a private park or historical building — one of the most important steps to take is to file for your tax-exempt status with the IRS. Like anything involving the federal tax code, the paperwork can get complicated. However, understanding the process will help you work your way through steps to filing your application in an orderly fashion so you can get started on your organization’s real work sooner rather than later.

What Is 501(c)(3)?

501(c)(3) is the very uncreative name for the part of the federal tax code that governs nonprofits. Under these rules, nonprofits are exempted from paying federal taxes, which allow you to put all of your money into your projects and programs. It also allows your donors to claim a tax deduction for their donation to your organization — a big plus when it come to getting people to give.

In order to qualify, your organization must exist for the sole purpose of your mission statement, and no funds can be passed to a shareholder or board member. You also have to follow strict rules about lobbying and political activities, which are restricted.

Steps for Your Application

1. Incorporate

Most nonprofits are set up like small corporations, with a board of directors and governing documents like bylaws and a mission statement. The process will allow you to get experienced people on your team. Incorporating is different in every state, and even though you may need to register your name and entity, it usually makes your application for 501(c)(3) status easier. This paperwork is done before you apply for your federal tax status as a nonprofit. If you choose not to incorporate, you’ll need to establish a trust or association instead.

2. Get an EIN

An Employer Identification Number (EIN) is another bit of tax paperwork you’ll need to fill out. The IRS assigns them to businesses and they are used to complete W-2s and various other forms at tax time. Think of it as a Social Security ID number for your nonprofit — you’ll need one for ID purposes and paperwork even if you don’t plan to hire any actual employees. Fortunately, applying for an EIN is very easy to do online.

3. Fill Out IRS Form 1023

The government wants to make sure that your nonprofit is one of the accepted types of tax-exempt groups, and the burden of proof is on you. Form 1023 is 26 pages long and asks all kinds of questions, including how you plan to pay employees, the type of work you’ll do and what your purpose is. You’ll also need to attach supporting documents, one of which is a narrative about your mission and work. If you have any doubts about how to answer the questions, it’s best to work with a lawyer or accountant who is well versed in tax law. There are also tutorials available online.

4. Double-Check Your State Laws

Though many states accept your federal 501(c)(3) status for the purposes of their own taxation, not all do. Check with your Secretary of State’s office to see if you need to complete any addition paperwork to avoid paying state, local or sales taxes in your area.

Once you get through the red tape of applying for your 501(c)(3) status, you’re ready to get down to business with fundraising and working towards your mission. Though the process can be long, the benefits of your nonprofit status cannot be overstated, and you’ll be glad you jumped through this hoop to help your work go as far as it can.