Why apply for 501(c)(3) status?
The benefits of having 501(c)(3) status include exemption from federal income tax and eligibility to receive tax-deductible charitable contributions. To qualify for these benefits, most organizations must file an application with, and be recognized by, the IRS as described in this publication. Another benefit is that some organizations may be exempt from certain employment taxes.
Individual and corporate donors are more likely to support organizations with 501(c)(3) status because their donations can be tax deductible. Recognition of exemption under section 501(c)(3) of the IRC assures foundations and other grant-making institutions that they are issuing grants or sponsorships to permitted beneficiaries.
An IRS determination of 501(c)(3) status is recognized and accepted for other purposes. For example: state officials may grant exemption from state income, sales, and property taxes; and the U.S. Postal Service offers reduced postal rates to certain organizations.
Who is eligible for 501(c)(3) status?
There are three key components for an organization to be exempt from federal income tax under section 501(c)(3) of the IRC. A not-for-profit (i.e., nonprofit) organization must be organized and operated exclusively for one or more exempt purposes.
Organized — A 501(c)(3) organization must be organized as a corporation, trust, or unincorporated association. An organization’s organizing documents (articles of incorporation, trust documents, articles of association) must: limit its purposes to those described in section 501(c)(3) of the IRC; not expressly permit activities that do not further its exempt purpose(s), i.e., unrelated activities; and permanently dedicate its assets to exempt purposes.
Operated — Because a substantial portion of an organization’s activities must further its exempt purpose(s), certain other activities are prohibited or restricted including, but not limited to, the following activities. A 501(c)(3) organization:
- must absolutely refrain from participating in the political campaigns of candidates for local, state,or federal office;
- must restrict its lobbying activities to an insubstantial part of its total activities;
- must ensure that its earnings do not inure to the benefit of any private shareholder or individual;
- must not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests;
- must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory; and
- may not have purposes or activities that are illegal or violate fundamental public policy.
Exempt purpose — To be tax exempt, an organization must have one or more exempt purposes, stated in its organizing document. Section501(c)(3) of the IRC lists the following exempt purposes: charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.
The most common types of 501(c)(3) organizations are charitable, educational, and religious.
Charitable organizations conduct activities that promote:
- relief of the poor, the distressed, or the underprivileged
- advancement of religion
- advancement of education or science
- erection or maintenance of public buildings, monuments, or works
- lessening the burdens of government
- lessening neighborhood tensions
- eliminating prejudice and discrimination
- defending human and civil rights secured by law
- combating community deterioration and juvenile delinquency
Educational organizations include:
- schools such as a primary or secondary school, a college, or a professional or trade school
- organizations that conduct public discussion groups, forums, panels, lectures, or similar programs
- organizations that present a course of instruction by means of correspondence or through the use of television or radio
- museums, zoos, planetariums, symphony orchestras, or similar organizations
- nonprofit day-care centers
- youth sports organizations
The term church includes synagogues, temples, mosques, and similar types of organizations. Although the IRC excludes these organizations from the requirement to file an application for exemption, many churches voluntarily file applications for exemption. Such recognition by the IRS assures church leaders, members, and contributors that the church is tax exempt under section 501(c)(3) of the IRC and qualifies for related tax benefits. Other religious organizations that do not carry out the functions of a church, such as mission organizations, speakers’ organizations, nondenominational ministries, ecumenical organizations, or faith-based social agencies, may qualify for exemption. These organizations must apply for exemption from the IRS. See Publication 1828, Tax Guide for Churches and Religious Organizations, for more details.
Public Charities and Private Foundations
Every organization that qualifies for tax-exempt status under section 501(c)(3) of the IRC is further classified as either a public charity or a private foundation. Under section 508(b) of the IRC, every organization is automatically classified as a private foundation unless it meets one of the exceptions listed in sections 508(c) or 509(a).
For some organizations, the primary distinction between a classification as a public charity or a private foundation is the organization’s source of financial support. Generally, a public charity has a broad base of support while a private foundation has very limited sources of support. This classification is important because different tax rules apply to the operations of each. Deductibility of contributions to a private foundation is more limited than deductibility of contributions to a public charity. See Publication 526, Charitable Contributions, for more information on deductibility of contributions.
In addition, private foundations are subject to excise taxes that are not imposed on public charities. For more information about the special tax rules that apply to private foundations, see Publication 4221-PF, Compliance Guide for 501(c)(3) Private Foundations and the Life Cycle of a Private Foundation website on www.irs.gov/eo.
Organizations statutorily classified as public charities under section 509(a) of the IRC are:
- organizations that provide medical or hospital care (including the provision of medical education and in certain cases, medical research);
- organizations that receive a substantial part of their support in the form of contributions from publicly supported organizations, governmental units, and/or from the general public;
- organizations that normally receive not more than one-third of their support from gross investment income and more than one-third of their support from contributions, membership fees and gross receipts from activities related to their exempt functions; and
- organizations that support other public charities.
If the organization requests public charity classification based on receiving support from the public, it must continue to seek significant and diversified public support in later years. Beginning with the organization’s sixth year of existence and for all succeeding years, the organization must demonstrate in its annual return that it receives the required amount of public support. If the organization does not meet the public support requirement, it could be reclassified as a private foundation.
In addition, to avoid unexpectedly losing its public charity classification, the organization should keep careful track of its public support information throughout the year, so that it will have the information it needs to complete Schedule A, Form 990 or 990-EZ. Unless the organization is committed to raising funds from the public, it may be more appropriate to consider an alternate statutorily based public charity classification. See Publication 557, Tax-Exempt Status for Your Organization, for assistance with determining how your organization would be classified.
What Responsibilities Accompany 501(c)(3) Status?
While conferring benefits on 501(c)(3) organizations, federal tax law also imposes responsibilities on organizations receiving that status.
Section 501(c)(3) organizations are required to keep books and records detailing all activities, both financial and nonfinancial. Financial information, particularly information on its sources of support (contributions, grants, sponsorships, and other sources of revenue) is crucial to determining an organization’s private foundation status. See Publications 4221-PC Compliance Guide for 501(c)(3) Public Charities and Publication 4221-PF, Compliance Guide for 501(c)(3) Private Foundations, Publication 557, Tax-Exempt Status for Your Organization, and the instructions to Forms 990, 990-EZ, and 990-PF for more information.
IRS Filing Requirements
Annual Information Returns – Organizations recognized as tax exempt under section 501(c)(3) of the IRC may be required to file an annual information return: Form 990, Form 990-EZ, or Form 990-PF along with certain schedules that may be required for your organization. Certain categories of organizations are excepted from filing Form 990 or Form 990-EZ including churches and very small organizations. See the instructions with each of these forms for more information. See Publication 4221 for more information about annual information return requirements.
Annual Electronic Notice – Small organizations are not required to file Form 990 if their gross receipts are normally $25,000 or less. These organizations must submit an annual electronic notice using Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ. The e-Postcard can only be filed electronically; there is no paper version.
Unrelated Business Income Tax – In addition to filing Form 990, 990-EZ, or 990-PF, an exempt organization must file Form 990-T if it has $1,000 or more of gross income from an unrelated trade or business during the year. The organization must make quarterly payments of estimated tax on unrelated business income if it expects its tax liability for the year to be $500 or more. The organization may use Form 990-W to help calculate the amount of estimated payments required. In general, the tax is imposed on income from a regularly carried-on trade or business that does not further the organization’s exempt purposes (other than by providing funds). See Publication 598, Tax on Unrelated Business Income of Exempt Organizations, and the Form 990-T instructions for more information.
Public Inspection of Exemption Applications and Returns – Section 501(c)(3) organizations must make their application (Form 1023) and the annual returns (Form 990 or Form 990-EZ) available to the public for inspection, upon request and without charge (except for a reasonable charge for copying). Each annual return must be made available for a three-year period starting with the filing date of the return. The IRS also makes these documents available for public inspection and copying. Private foundation returns (Form 990-PF) are subject to the same disclosure rules. These documents must be made available at the organization’s principal office during regular business hours.
Upon request, an organization must furnish copies of the application and the three most recent annual returns. The requests may be made in person or in writing. See Publication 557 for more information.
For tax years beginning after August 17, 2006, section 501(c)(3) organizations that file unrelated business income tax returns (Forms 990-T) must make them available for public inspection, and the IRS must make those returns publicly available.
Charitable Contributions— Substantiation and Disclosure – Organizations that are tax exempt under section 501(c)(3) of the IRC must meet certain requirements for documenting charitable contributions. The federal tax law imposes two general disclosure rules: 1) a donor must obtain a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return; 2) a charitable organization must provide a written disclosure to a donor who makes a payment in excess of $75 partly as a contribution and partly for goods and services provided by the organization. See Publication 1771, Charitable Contributions – Substantiation and Disclosure Requirements, for more information.
A donor cannot claim a tax deduction for any contribution of cash, a check or other monetary gift made on or after January 1, 2007, unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
How to Apply for 501(c)(3) Status
Organizations that want to apply for 501(c)(3) status should be aware of the forms required, the user fee, the filing deadline, and the processing procedures.
Forms to File
IRS Form SS-4: An employer identification number (EIN) is your account number with the IRS and is required regardless of whether the organization has employees. Include the organization’s EIN on all correspondence to the IRS. Apply for an EIN by completing Form SS-4, Application for Employer Identification Number, by calling toll-free (866) 816-2065, or by submitting an online version of the form.
IRS Form 1023: Complete Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and mail to the address indicated in the instructions. The required user fee must accompany Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (31 pages as of October 12, 2012). See the Instructions for IRS Form 1023 (38 pages as of October 12, 2012). The IRS will not process an application until the user fee is paid. The fee is $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period or $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period.
IRS Forms 2848 and 8821: Attach Form 2848, Power of Attorney and Declaration of Representative, if someone other than your principal officer or director will represent you on matters about the application. Attach Form 8821, Tax Information Authorization, if you want the IRS to be able to provide information about your application to someone other than a principal officer or director.
When to File IRS Form 1023
Most organizations must file Form 1023 by the end of the 15th month after they were created, with a 12-month extension available. An organization that is not a private foundation is not required to file Form 1023 unless its annual gross receipts are normally more than $5,000. An organization must file Form 1023 within 90 days of the end of the year in which it exceeds this threshold.
Example 1: An organization that was created on January 1, 2012, and exceeds the gross receipts threshold, must file Form 1023 by April 30, 2015.
Example 2: An organization that was created on January 1, 2007, but did not exceed the gross receipts threshold until September 30, 2011, must file Form 1023 by March 31, 2012. An organization that files its application before the deadline will be recognized as tax exempt under section 501(c)(3) of the IRC from the date of its creation. An organization that files an applica-tion after the deadline may be recognized as tax exempt from the date of the application; it may also request exemption retroactive as of the date of creation. See the Instructions for IRS Form 1023 for more information.
The IRS tax specialist reviewing an application may request additional information in writing. If all information received establishes that an organization meets the requirements for exemption, the IRS will issue a determination letter recognizing the organization’s exempt status and providing its public charity classification. This is an important document that should be kept in the organization’s permanent records.
While the IRS Form 1023 Application is Pending
While an organization’s Form 1023 is waiting for approval from the IRS, the organization may operate as a tax-exempt organization. If an annual exempt organization return is due, the organization must file it, indicating that its application is pending. These returns are subject to public disclosure. If the organization has unrelated business income of more than $1,000, it must also file a Form 990-T. See Publication 4221-PC or 4221-PF for more information.
Although donors have no assurance that contributions are tax-deductible for federal income tax purposes until the application is approved, contributions made while an application is pending would qualify if the application is approved. However, if the application is disallowed, contributions would not qualify. Moreover, the organization would be liable for filing federal income tax returns unless its income is otherwise excluded from federal taxation.
Caution: The information in this article was current as of October 12, 2012. Check the IRS website at www.irs.gov to determine if anything in this article changed after October 12, 2012.