Nonprofit organizations operate on tight budgets, maximizing every dollar to further their mission. Obtaining tax-exempt status is a critical step in reducing financial burdens and extending the impact nonprofits can make within their communities. With tax exemption, nonprofits gain several advantages, such as increased credibility with donors and exemption from federal taxes, benefits that directly contribute to their cause. Also, donations may become tax-deductible to the donor when the organization is a qualified exempt organization. Organizations eligible to receive tax-deductible charitable contributions can be found on the IRS website.
If you’re wondering how to apply, the key is completing IRS Form 1023 or the streamlined 1023-EZ to request tax-exempt status. Since these forms can be lengthy and detail-heavy, even minor errors can lead to delays or denial. By consulting with a tax professional, such as a Utah-based Certified Public Accountant, you can ensure your application is both complete and accurate, giving your nonprofit the best chance at success.
In this post, we’ve laid out the process for you, with details about the requirements and forms to be completed. Keep reading to learn everything you need to know about applying for tax-exempt status.
Many people assume that establishing a nonprofit automatically provides tax-exempt status. That’s not the case. Most nonprofits must apply for and receive approval from the IRS under section 501(c)(3) or other applicable categories to qualify as tax-exempt.
The application process involves completing either Form 1023 or the streamlined Form 1023 EZ and submitting it to the IRS for approval. The IRS asks nonprofits to complete these forms online with any supplementary materials.
If your nonprofit is approved for tax-exempt status, it means your net profits won’t be taxable on a federal level. Some states also offer tax exemptions to nonprofits. For example, Utah nonprofits may be eligible for state-level exemptions if they are approved as a 501(c) status organization by the IRS.
When you apply for tax-exempt status, there are several options to consider. It’s important to understand what they are and choose the status that best applies to your nonprofit.
The most common tax-exempt status is known as 501(c)(3). To qualify as a 501(c)(3) organization, a nonprofit must operate for exempt purposes, and no part of its net earnings may “inure to any private shareholder or individual.”
To qualify as a 501(c)(3) organization, your nonprofit must exist for exempt purposes such as charitable, religious, educational, or scientific work. You’ll need to provide documentation that supports how your activities align with these purposes. Read the IRS guidelines for the IRS’s complete list of exempt purposes.
When you complete Form 1023 or 1023-EZ, you’ll be required to provide documentation proving that your organization meets these qualifications.
A few other categories under the IRS code confer exempt status. These include things like fraternal organizations and veterans’ organizations. Your organization would need to meet all requirements and specifications laid out by the IRS. You can read more about exempt organization types here.
Here are the most important benefits of being granted tax-exempt status by the IRS.
If you can qualify, your organization will benefit both financially and reputationally, allowing you to do more good work with the donations you receive. For instance, many nonprofits use the money they save on taxes to hire staff, expand their charitable programs, or even reach new donor bases. Donors benefit, too, since they can deduct their donations when they file their own taxes.
Here’s our step-by-step guide to completing IRS Form 1023.
Before you file, you’ll need to know when to file. Some important deadlines must be met, and missing them can result in potential risks.
You should complete and file Form 1023 within 27 months of the end of the month in which your organization was legally formed. For example, if you started your organization in January of 2023, you would need to file Form 1023 or Form 1023-EZ no later than April 30, 2025, if you want your tax-exempt status to be retroactive to the time when you started your organization.
You can still file after the 27-month period has elapsed. In that case, your exempt status will only be retroactive to the date of your filing. Using the example above, if you filed in June of 2025, you’d only be exempt starting in June. That means you’d be required to pay taxes and late fees from January of 2023.
Since it can be time-consuming to complete Form 1023, we suggest that nonprofits who want exempt status begin the process as soon as possible after organizing.
Before you fill out Form 1023 or 1023-EZ, you’ll need to make sure that you meet the basic requirements to request exempt status. You’ll also need to gather the following items.
With your EIN and proper paperwork in hand, you’ll be ready to take the next step: choosing the right form to file.
Nonprofits must complete either Form 1023 or Form 1023-EZ to be granted exempt status. You can determine your eligibility to file Form 1023-EZ by completing the Form 1023-EZ Eligibility Worksheet. It asks a series of questions about your gross receipts, assets, and other topics to determine whether you can use the streamlined form. For example, organizations with gross receipts over $50,000 are not eligible.
You can read the complete questionnaire here. The streamlined form has a few pros and cons.
Pros:
Cons:
In general, smaller or newer organizations are the most likely to qualify for Form 1023-EZ, while larger and more established nonprofits will probably need to use Form 1023.
Both Form 1023 and Form 1023-EZ must be completed online. The former is longer and requires you to submit attachments. The general requirements for Form 1023 include information about your organizational structure, mission, exempt activities, compensation and financial data, and foundation information.
That might sound overwhelming, but an experienced CPA team can help you navigate the process and avoid errors, like missing an attachment or checking the wrong box on the form. Certain nonprofits, such as churches, schools, and hospitals, may also need to complete specific schedules to include with Form 1023.
You can view the full form here to understand what’s required. Because it's important to get everything right, we strongly recommend working with a professional to ensure you complete the form properlyy.
One thing that makes Form 1023 different from other IRS forms is that online filing is required. There is no paper form. Here are the steps to file.
You may pay with a credit card, debit card, or via an ACH payment from your bank.
We strongly recommend that any nonprofit applying for tax-exempt status should work with a CPA during the process. With professional guidance, you can avoid common mistakes like forgetting required attachments or selecting the wrong foundation classification, which is one of the many benefits of hiring a CPA.
Working with a CPA comes at a cost, but it’s an investment that can help you save money in the long run. For example, their counsel can prevent errors that delay your approval as an exempt organization and could cost you money in back taxes and late penalties.
At CMP, our tax professionals have extensive experience with both federal and Utah tax exemption applications. We’re here to guide you through the process, streamline your approval, and help you avoid unnecessary costs.
You may wonder how long it takes for the IRS to review and approve or reject a Form 1023 application.
The timeline is longer than you might expect. While it can vary depending on how busy the IRS is, it’s a good rule of thumb to expect it to take at least six months and possibly as long as nine months to hear back from the IRS.
The IRS generally processes Form 1023 applications in the order they are received. However, there are a few special circumstances in which an application might be expedited. One example is if an organization has been formed to provide relief to victims of an emergency. You can find more information here.
It’s not uncommon for the IRS to request more information before making a determination. This is why working with a CPA is so valuable—they can help you respond quickly and effectively to keep your application moving forward.
During the IRS review process, you can prepare for approval by ensuring your organization is ready for compliance. For example, you can develop a plan to file annual IRS Form 990 reports and organizeg internal records to document exempt activities.
Focusing on your mission and preparing for compliance are both good uses of your time during the waiting period. You may also want to check out resources for nonprofits, such as:
A nonprofit organization operating for exempt purposes, such as improving a neighborhood, setting up a food bank, or running STEM workshops in underserved communities, may apply for tax-exempt status. Exempt purposes may include education, scientific or medical research, or improving a neighborhood or city. To qualify, your organization must be structured as a corporation, LLC, or unincorporated association or trust.
Expect 6–9 months for approval of a federal tax exemption and up to three months for an exemption in Utah. Processing times vary from state to state. In the meantime, focus on setting up strong internal recordkeeping to remain compliant once approved.
The short answer is that Form 1023 is longer, more involved, and requires nonprofits to submit multiple attachments, while 1023 EZ is significantly shorter and less involved. Small or start-up nonprofits can save time and money by using 1023 EZ if they qualify.
Utah-based nonprofits may apply for a sales tax exemption. To do so, you’ll need to complete Form TC-160 and include a copy of the determination letter from the IRS confirming your tax-exempt status on the federal level.
If you don’t have a determination letter from the IRS, you may be required to attach a copy of your articles of organization and an affidavit confirming that you are engaged in exempt activities. Utah sales tax exemption applications take an average of three months to process.
Property tax exemptions are available in Utah and are determined by the county Board of Education in the county where the property is located.
To qualify for a new exemption, you must apply within 120 days from the day the property was acquired or, if you miss that deadline, by March 1 of the following year.
You can complete the application for a property tax exemption online here.
Securing tax-exempt status provides your nonprofit with crucial financial and reputational benefits that can amplify the work you do for your community. Navigating the process efficiently will unlock new opportunities to serve people, expand your mission, and make a lasting difference.
For Utah-based nonprofits, our team of experienced CPAs can help ensure a smooth application process while addressing both federal and state-specific requirements so you can focus on what matters most—your mission.