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What are the differences between for profit and nonprofit corporations?
What are the differences between tax-exempt and nonprofit corporations?
Why form a tax-exempt nonprofit corporation?
Does my corporation qualify as a tax-exempt nonprofit?
Is there more than one category of tax-exempt organization?
What benefit does being 501c3 offer my nonprofit and its contributors?
What are the disadvantages of forming a tax-exempt nonprofit?
Can a nonprofit corporation make a profit?
What form is required for 501c3 status?
With who is Form 1023 filed?
What are the fees to file Form 1023?
Is there a state application as well as federal?
How long does it take to complete Form 1023?
How long does it take for the IRS to approve 501c3 status?
What happens if the application is rejected?
Can anyone complete Form 1023?
Will my personal tax or financial situation affect my nonprofit receiving 501c3 status?
What information will be required on Form 1023?
When does Form 1023 need to be filed?
Does Form 1023 need to be notarized?
Can Form 1023 be filed online?
Can I file Form 1023 before having the Articles of Incorporation for my nonprofit?
Can I start receiving contributions before Form 1023 is approved?
Can I apply for grants before Form 1023 is approved?
If my nonprofit is tax-exempt, do I pay any type of taxes?
Will my nonprofit be given a 501c3 number separate from its EIN?
Once my nonprofit has been granted 501c3 status, what needs to be done to maintain that status?
What are the differences between for profit and nonprofit corporations?
Profit corporations are authorized to issue shares of stock to shareholders in return for capital investments. Shareholders receive a return on their investments when dividends are paid or when assets are distributed after dissolution. Nonprofit corporations neither issue shares nor pay dividends, and when it dissolves, the remaining assets must be distributed to another tax-exempt nonprofit group.  Top
What are the differences between tax-exempt and nonprofit corporations?
Nonprofit does not mean tax-exempt. A “tax-exempt organization” is a unique entity that is usually a nonprofit organization. However, a nonprofit organization cannot be exempt from Federal and State income or franchise tax until the organization applies for an exemption and the IRS and the state franchise board issues a determination of exemption. Top
Why form a tax-exempt nonprofit corporation?
Being organized as a tax-exempt corporation is a common requirement for obtaining grant funds from government agencies and private foundations. Generally, tax-exempt government foundations as well as private foundations and charities are required by their own operating rules and by IRS regulations to donate their funds only to 501(c)(3) tax-exempt organizations or else forfeit their own tax-exempt status. Top
Does my corporation qualify as a tax-exempt nonprofit?
To qualify for exemption under the Internal Revenue Code, your organization must be organized for one or more of the purposes specifically designated in the Code. For an organization to qualify under a 501(C)(3) exemption, it must be organized for one or more of the following purposes:
- Charitable
- Religious
- Educational
- Scientific
- Literary
- Testing for public safety
- Fostering national or international amateur sports competition
- The prevention of cruelty to children or animals
Additional tax exemptions exist under separate sections of the IRC for groups including: labor unions, chambers of commerce, social and recreational clubs, fraternal societies, civic leagues, credit unions, farmers’ coops and mutual insurance companies, and legal service organizations. Top
Is there more than one category of tax-exempt organization?
Yes. The one most familiar (and addressed in subsequent questions below) is the Internal Revenue Code (IRC) Section 501(c)(3) public charity or private foundation, which is 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. There are also IRC Section 501(c)(4) through 501(c)(27) organizations that are considered tax-exempt, but not charitable. Examples include trade associations, social clubs and certain advocacy organizations involved in substantial political lobbying activity. Click here to view the IRS classification chart. Top
What benefit does being 501c3 offer my nonprofit and its contributors?
One of the primary benefits of being considered 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. Top
What are the disadvantages of forming a tax-exempt nonprofit?
Your nonprofit income activities will be in most part restricted to the stated purpose of. Top
Can a nonprofit corporation make a profit?
Yes. A nonprofit corporation can take in more money than it spends. It can use the tax free profits for its own operating expenses including salaries. What a nonprofit corporation cannot do is distribute any profits to officers, directors or employees. Top
What form is required for 501c3 status?
To apply for IRS 501(c)(3) recognition, IRS Form 1023 must be completed and filed. Top
With who is Form 1023 filed?
Form 1023 is filed with the Cincinnati Service Center of the Internal Revenue Service. Top
What are the fees to file Form 1023?
The IRS has a two-tiered filing fee structure. Most organizations pay the standard $850 filing fee when sending their application to the IRS. 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. Top
Is there a state application as well as federal?
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. Top
How long does it take to complete Form 1023?
IRS Form 1023 is 28-pages long, plus required schedules and attachments. While every organization does not have to complete every page, a typical application package is between 25-75 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. Top
How long does it take for the IRS to approve 501c3 status?
Typically, IRS 501(c)(3) approval takes between 4 and 6 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. Top
What happens if the application is rejected?
A negative 501(c)(3) determination by the IRS can be appealed. 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. Top
Can anyone complete Form 1023?
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, While the IRS rejects slightly less than 10% of applications filed, more than one-third are abandoned by the filer…usually out of frustration or inability to answer the IRS follow-up questions. Out of approximately 80,000 applications filed annually, nearly half never make it through the process. Top
Will my personal tax or financial situation affect my nonprofit receiving 501c3 status?
No. There is no direct correlation between the organization and the financial, tax or credit status of any officer, director or employee. Top
What information will be required on Form 1023?
In order for the IRS to make a determination, 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. Top
When does Form 1023 need to be filed?
Generally, Form 1023 should be filed within 27 months of the organization’s formation. For practical reasons, many organizations find it better to apply as soon as possible following formation. Extensions beyond 27 months may be possible under a variety of circumstances. Top
Does Form 1023 need to be notarized?
Form 1023 requires the signature of an officer of the organization, but it does not need to be notarized. Top
Can Form 1023 be filed online?
Form 1023 cannot be filed online. Top
Can I file Form 1023 before having the Articles of Incorporation for my nonprofit?
Yes, but it is generally 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. Top
Can I start receiving contributions before Form 1023 is approved?
Generally, yes. The IRS 501(c)(3) recognition is usually retroactively effective 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. Under certain circumstances, IRS tax-exemption may only be retroactive to the date of the filing of Form 1023. Top
Can I apply for grants before Form 1023 is approved?
Technically, yes, but most foundations, government agencies and other funders, will require an organization to possess an approved IRS 501(c)(3) determination letter. Top
If my nonprofit is tax-exempt, do I pay any type of taxes?
Possibly. 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 generally subject to federal and state employment 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. Top
Will my nonprofit be given a 501c3 number separate from its EIN?
No. Your EIN is the only number federally associated with your organization. If you apply for and receive sales tax-exemption in your state (if available), you may have a number issued by that state agency that is different from your EIN. Top
Once my nonprofit has been granted 501c3 status, what needs to be done to maintain that status?
At a minimum, the organization must continue to operate for the purposes for which it received tax exemption. In addition, certain federal and state compliance filings may be required. Top
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