How to File Your 501(c)3 Application for Your Nonprofit
Your non-profit organization does not gain automatic tax-exemption. You must apply for it by filing a 501(c)3 application.
Discover what you need to do to file this application, including how an attorney can assist you with the process. Ensuring that you do it properly can make the process easier and make sure you get the tax-exempt status you should have as a non-profit.
What Is a 501(c)3 Application?
A 501(c)3 application is a tax exemption application that you file with the Internal Revenue Service. It is not mandatory to file this form. However, if you do not, then your nonprofit will not have tax-exempt status and will have normal tax obligations. To ensure you have tax-exempt status from the start, you should file this application as part of the process of forming your nonprofit.
Applying for 501(c)3 tax-exempt status can be a complex procedure that will take time and attention. The process involves gathering a lot of information and completing multiple documents. For example, one of the forms you must fill out is 28 pages long and requires additional attachments. It is not uncommon for applicants to end up with over 100 pages to submit. It’s important to work with an experienced attorney who can guide you through the process to ensure your application is complete.
Benefits of Obtaining Tax-Exempt Status
Tax-exempt status provides your organization with a number of benefits that can allow you to focus on your chosen cause or mission. The main benefit is saving money because you avoid having a federal tax liability.
Another benefit is that donations are tax-deductible for the donor. This encourages people to donate, which can increase your profits.
Having this status can add to your organization’s credibility as a non-profit. When donors see that you hold this status, they know you went through the IRS verification process and are subject to IRS reviews. This tells them you are a true non-profit organization. It gives them peace of mind that they can trust you to use their donations properly.
Gaining federal tax-exempt status makes it easier for your organization to qualify for exemptions from state income, sales and employment taxes.
You receive the benefit of being able to apply for grants and other private allocations that are available only to IRS-recognized 501(c)3 organizations. This will increase your ability to get money for your organization.
This status also makes you eligible to receive significant discounts on postal rates. This includes cost-saving rates on bulk mailing orders.
You will receive flexible and generous limits before you have to pay federal or state unemployment tax liabilities. Again, this is another cost-saving benefit that allows you to put profits to use for your main mission instead of administrative costs.
Finally, you, donors, members and anyone else involved with your organization have limited liability under the law for the nonprofit’s debts.
Applying for 501(c)3 Tax-Exempt Status
Before completing a 501(c)3 form, you must establish your organization as a nonprofit at the state level by filing your Articles of Incorporation with your state government. This allows you to obtain a federal tax ID number from the IRS, which then will allow you to apply for 501(c) tax-exempt status.
The IRS states that organizations formed for the following specific reasons can apply to receive 501(c)3 status:
- Preventing cruelty toward animals and or children
- Public safety testing
States Requiring a Separate Application
In select states, you have to file an additional application to receive an exemption from state tax liability. However, most states will grant automatic tax-exempt status when you file to receive federal 501(c)3 status. The states requiring a separate application include the following:
- North Carolina
What Happens After I’ve Applied for 501(c)3 Status?
The 501(c)3 application process is like an audit of your nonprofit organization. The IRS will check to ensure your organization’s structure and past and proposed activities qualify you to receive tax-exempt status. The audit is very thorough and examines your programs and board structure to see if it aligns with your stated mission. The IRS will also check for any potential conflict-of-interest, such as monetary benefits for your nonprofit’s individual members. If it finds any such conflicts, it’s highly probable the IRS will deny your application.
Renewal of Your Status
The states that require you to file a separate application may require regular renewal of your tax-exempt status. The requirement to renew and the frequency of renewal will vary by state, so it’s advised to work closely with a business attorney to ensure your status remains valid.
You do not have to renew your federal tax-exempt status. However, it is possible to lose your federal status if you break the rules set by the IRS for qualification.
Loss of Your 501(c)3 Nonprofit Status
You wouldn’t want to jeopardize the 501(c)3 status of your nonprofit organization, so it’s important to be aware of activities that may strip you of your 501(c)3 status. The first one of which to be aware of is that a shareholder or individual cannot benefit from the profits of your organization.
You also need to be aware of the IRS rules concerning lobbying. There are two tests the IRS uses to determine if your organization is lobbying to influence legislation. If you fail the tests and the IRS deems you are lobbying, then you lose your status. Additionally, you cannot participate in political campaigning of any kind.
Finally, you cannot have business income that’s not related to your organization’s main purpose. If you do have such activity, it is separate from the organization and does not qualify for tax-exemption under your 501(c)3 status.
To avoid the pitfalls and eliminate the risk of losing your 501(c)3 status, it’s important to work with an experienced business attorney who will be able to navigate your state’s laws as well as federal requirements.
Work with an Experienced Local Lawyer
The 501(c)3 application process is complex, time-consuming, and specific to the state you’re in. Is your nonprofit is ready to become a 501(c)3-certified organization? We can connect you with a reliable and experienced business attorney who will guide you through the process and help ensure your application is successful.
Submit a request online or call us today at (866) 345-6784 to get in touch with an experienced lawyer in your area!