501(c)(3) status exempts nonprofits from income taxes, thus allowing them to dedicate more of their funds toward their mission.
What is the benefit of being a 501c3?
Another benefit is that 501(c)(3) status makes donations to the organization tax-deductible, which makes soliciting donations much easier. There are additional benefits as well, depending on the location of your organization. In some states, 501(c)(3) organizations can be exempt from sales tax and property tax as well.
What type of 501(c)(3) should I apply for?
But before you can take advantage of those tax relief incentives, you’ll have to be approved for 501(c)(3) status first. To qualify, no one that owns or is employed by your organization can make a personal profit from revenue, and your organization must not be involved in any political campaigns.
There are three types of 501(c)(3) organizations:
- Public Charity: These organizations receive much of their funding from public support, either from government spending or donations from private individuals and companies. Donations to public charities from individuals are deductible for up to 50% of that individual’s income. For companies, the deductible limit is usually closer to 10%. Also, the people who run a public charity must be, for the most part, unrelated.
- Private Foundation: These are organizations that are funded by a small collection of private donors, or even just a single donor. Their primary activity is supporting public charities through grants rather than working directly with people on the ground. Donations to private foundations from individuals are deductible for up to 30% of that person’s income, and there are no restrictions on how related the people running a private foundation can be.
- Private Operating Foundation: This type of organization is a hybrid between a public charity and a private foundation. Like a public charity, they spend most of their time working directly with people rather than giving grants to other organizations. Like a private foundation, they are funded by a close group of private donors rather than broad public support.
A more detailed description of which organizations do and don’t qualify for 501(c)(3) status can be found here. If it looks like you do qualify after checking out all that criteria, here are a few tips that will help you apply correctly:
1. Submit Detailed and Thorough Records
A lot of information needs to be sent over to the IRS for you to be approved for 501(c)(3) status. You’ll need to prepare financial data, profiles of your board members, articles of incorporation or association, adopted by-laws, etc. The more detailed information you send to the IRS, the less likely you are to experience any delays.
Organizations in some states will have to fill out more paperwork than organizations in others. In the majority of states, you’ll have to register for charitable solicitation before you accept any donations. Also in most places, your federally-approved 501(c)(3) status will automatically provide you the state benefits as well, but in a few states (California) you’ll have to go through an entirely separate review process to be exempt from taxes at the state level.
2. Don’t Get Lazy with the Narrative
Often, approval of a 501(c)(3) application will get pushed back by the IRS because the long-form narrative portion of the application lacks detail.
It’s understandable why a lot of people get lazy here – the application process can take a lot of time, and adding a whole essay on top of that just seems gratuitous.
But if you get frustrated and rush through it, you’re only going to make things harder on yourself in the long run. An insufficient narrative could very well extend the application process much longer than it needs to be. Detail everyone’s role in your organization extensively and make a compelling argument for why your organization deserves 501(c)(3) status.
And don’t forget the context of this essay. Bolster every argument for 501(c)(3) status you make by referencing in name the specific supporting tax code (for example, “According to Section 1.501(c)(3)-1(a)…”).
3. Make Sure You Send the Fee Over in the Right Amount
The content on the IRS’s official website is, for the most part, very professional-sounding and without emotion.
One exception to this cool and collected tone can be found on the IRS’s set of tips for successfully applying for 501(c)(3) status. Their number one tip, uncharacteristically written in all caps, bolded, italicized, and followed with an exclamation point is “INCLUDE THE CORRECT USER FEE!”
They weren’t as emphatic about anything else as much as the user fee, so it must be something many organizations have a problem with. Make sure you get it right.
4. Proofread Everything
Check every form for errors immediately after you complete it. Even the most observant among us miss something now and then. As the old saying goes, measure twice, cut once – you can’t be too careful when you’re dealing with the IRS.
Also, from that list above of 501(c)(3) status tips on the official IRS site is the advice of “complete all required pages”. You would think that is common sense, but apparently, enough people miss a page or two that the IRS has to make a point of posting a reminder.
Before you fill out too many pages, though, make sure you’re filling out the right forms first. If available to your business, the 1023-EZ will save you the most time. The 1023-EZ will also save you some money, as its processing fee is $275 (for the standard 1023, the fee is $600 if the organization has made more than $10,000/year over a 4-year period and $400 if they made less).
5. Review Your Documents with an Accountant Before You Send
This is not an appropriate task for the DIY approach. Unless you have a background in accounting yourself, it would not be wise to send off your 501(c)(3) application documents before reviewing them with a professional accountant that is experienced in working with non-profits, as any mistake you make could result in extensive delays, and amateurs often make mistakes. Having an accountant help you out with this process will allow you to avoid any such delays and get your 501(c)(3) status as soon as possible.
Applying for 501(c)(3) status can be cumbersome and intimidating. Consider discussing the submission with an accountant that is well-versed in the process. Following the guidance shared in these five tips will help you through the process.
Not sure if a 501(c)(3) is right for your organization? Schedule a free consultation with CMP by clicking below.