Organizations can qualify for 501(c)(3) status, but they must file specific applications with federal and state authorities in order to confirm that status. Note that this article focuses on the tax exemption application process for 501(c)(3) organizations. Information about applying for exemption under another 501(c) Section is available on the IRS website.
How to apply for Federal 501(c)(3) tax-exempt status
In order to qualify for tax-exempt status under Code Section 501(c)(3), the organization must be organized and operated exclusively for one of the exempt purposes set forth in Code Section 501(c)(3): "charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals."
Specific language needs to be included in the organization's formation documents, filed with the state of formation (e.g., Certificate of Incorporation), restricting its activities to those described in Code Section 501(c)(3) as well as how assets are distributed upon dissolution.
Organizations seeking status under Code Section 501(c)(3) must submit a Form 1023 (exemption application) with the IRS, together with the applicable filing fee. The Form 1023 requires an organization to provide information, including, but not limited to:
- its EIN (required to file application),
- past, current, and future activities;
- governance information;
- adoption of certain policies;
- projected financial information;
- and other operations.
A Form 1023-EZ is available for certain organizations whose expected gross receipts will not exceed $50,000 during the first three years of operation and meet other requirements. The Form 1023-EZ is much shorter than the Form 1023, has a lower filing fee, and generally has a quicker timeframe for review. A Form 1023-EZ eligibility checklist is available on page 13 of the 1023-EZ Instructions. Organizations should review this carefully to confirm their eligibility to submit Form 1023-EZ. Further information about Form 1023 and Form 1023-EZ is available on the IRS website.
The organization's tax-exempt status will be retroactive to the date of incorporation, as long as it files the exemption application within 27 months after it was formed and remains current on its annual Form 990 series filings. All exemption applications are filed online with the IRS at Pay.gov.
Keep in mind that the IRS’s estimated processing times for exemption applications can be lengthy. The current wait time varies depending on the type of application submitted. For some, it can take over ten months. A nonprofit may submit a written expedited request to the IRS if it has a compelling reason, but the IRS has discretion in granting such a request. Compelling reasons include a pending grant where failure to receive that grant will adversely impact the organization's ability to operate, a newly created organization providing disaster relief, and IRS errors that have caused undue delays in issuing a determination letter.
State tax exemptions requirements for 501(c)(3) organizations
Gaining federal tax-exempt status under Code Section 501(c)(3) does not automatically exempt organizations from state and local taxes. Many states have their own requirements for organizations to benefit from state tax exemptions such as corporate and sales tax.
In New York State, Code Section 501(c)(3) organizations qualify for exemption from franchise (corporate) tax. While not required, a Form CT-247 may be filed with the New York State Department of Taxation to confirm this exemption. Form CT-247 is available here. Organizations exempt under Code Section 501(c)(3) also qualify for sales tax exemption. The application is made by submitting Form ST-119.2 with a copy of the organization's IRS determination letter. Form ST-119.2 is available here.
In California, 501(c)(3) organizations typically qualify for exemption from income tax, but there is no broad exemption for sales and use tax. Form 3500 or 3500A must be filed with the California Franchise Tax Board to apply for the exemption. Most organizations must also file an annual statement of information to remain in corporate good standing with California.
In Massachusetts, most nonprofits qualify for income and sales tax exemptions. To qualify for these exemptions, the organization must apply online for a Certificate of Exemption with the Department of Revenue through MassTax Connect. Corporations must also file an annual corporate report to remain in corporate good standing.
Some states have annual charity filing requirements
Organizations that operate for charitable purposes or solicit contributions to be used for charitable purposes may also be required to register and file annual reports with state charity regulators. State laws differ, but the majority of states require registration and annual reports. Individuals who are paid (and are not employees of a charity) to solicit on behalf of or advise a charity in connection with a charitable solicitation may also be subject to registration requirements. Penalties for violating registration requirements are generally civil and generally include a requirement that the charity register to solicit contributions but may also include forfeiture of funds raised and payment of fines.
Because definitions vary from state to state, it is important that an organization review its fundraising activities to determine whether registration/reporting in a particular state is required.