Step 12: Obtain income tax-exempt status from IRS
Once the organization’s articles of incorporation have been filed and the bylaws have been approved by the initial board of directors, the next step for a new nonprofit is applying for federal tax exemption from the Internal Revenue Service. Approximately 97 percent of applications for tax-exempt status are approved by the IRS. Approval can take up to six months.
Organizations should complete the federal filing requirements within 27 months of formation to be considered tax-exempt back to the date of formation. A common myth is that all nonprofits are automatically tax-exempt or that all donations, at any time, may be considered tax-deductible contributions. This is only true if the organization submits all necessary forms within 27 months of incorporation and subsequently receives the necessary exempt status from the IRS.
There are several steps and filing requirements an organization needs to complete before receiving exemption. And even then, not all organizations qualify for the same exemptions. The following applies for 501(c)(3) status from the IRS, the most common type of tax-exempt organization. Religious houses of worship do not need to file Form 1023 for tax-exempt status or file annual tax return form IRS Form 990. Purely religious congregations automatically qualify for tax exemptions through a separate process.
IRS Publication 557 — Tax-Exempt Status for Your Organization. This 80-page “instruction manual” lays out the federal laws regulating tax-exempt organizations. It is available free and serves as a useful reference guide for filing requirements, employment issues, lobbying expenditures, and many other complex nonprofit issues regulated by IRS codes.
IRS Form 1023 — Application for Recognition of Exemption under 501(c)(3) of the Internal Revenue Code. Form 1023 applies for a ruling or determination letter on an organization’s exempt status under Section 501(c)(3). Organizations applying for exemption under another 501(c) section should file IRS Form 1023. Processing time varies, but can take six months.
Filing Fees: $600. To expedite your application process, send your payment in the form of a bank or cashier’s check. Your application may be delayed for up to 30 days while awaiting confirmation that a personal or business check has cleared. Mail to: Internal Revenue Service, P.O. Box 192, Covington, KY 41012-0192. To file using a private delivery service, use the following address: 201 West Rivercenter Blvd., Attn: Extracting Stop 312, Covington, KY 41011
[Note: If you are a small organization, you can possibly save time and money by filing Form 1023-EZ instead of Form 1023. You can find more information on filing this form, below.]
IRS Form 1023-EZ — Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible to apply for a ruling or determination on an organization’s exempt status via the Form 1023-EZ. This form is three pages long, compared with the standard 26-page Form 1023. Most small organizations qualify to use the new streamlined form. The EZ form must be filed online using pay.gov, and a $275 user fee is due at the time the form is submitted. Instructions are available online and include an eligibility checklist that organizations must complete before filing the form. Further details on the Form 1023-EZ application process can be found on IRS.gov. Processing time can take three months.