Becoming Tax Exempt: A Step-by-Step Guide
Simplify the path to achieving nonprofit tax-exempt status
Starting a nonprofit is an exciting way to make a difference, but the process of obtaining 501(c)(3) status can feel intimidating. This designation from the IRS allows your organization to operate tax-free and gives donors the ability to make tax-deductible contributions. It’s a critical step, but navigating the forms, legal jargon, and requirements can be overwhelming.
This guide simplifies the process, walking you through each step with clear explanations and tips to help your nonprofit achieve its mission faster.
Step 1: Define Your Mission and Purpose
Your mission is the heart of your nonprofit. It describes the problem you’re addressing, the audience you’re serving, and the impact you aim to make. The IRS will evaluate your mission to ensure it aligns with the 501(c)(3) requirement of operating for a charitable, religious, or educational purpose.
What Makes a Strong Mission Statement?
- Clarity: Be specific about your goals and activities.
- Charitability: Use IRS-recognized terms like “educational,” “relief of the poor,” or “environmental.”
- Inspiration: Motivate donors and supporters with your purpose.
Example:
Instead of “Helping the community,” try:
“Our mission is to provide affordable housing solutions for low-income families in [region].”
Step 2: Incorporate Your Organization
Before applying for 501(c)(3) status, you’ll need to incorporate your nonprofit at the state level. Incorporation gives your organization a legal identity and is a required step for submitting IRS Form 1023.
What Does Incorporation Involve?
- Choosing a Name: Your nonprofit’s name must comply with state laws and should clearly reflect your mission.
- Articles of Incorporation: This legal document establishes your nonprofit’s purpose and structure.
- Bylaws: Internal rules that outline how your organization will operate, including how decisions are made and how the board of directors is structured.
Pro Tip: Some states require specific language in the Articles of Incorporation to meet IRS requirements, including clauses about your nonprofit’s purpose and what happens to assets if the organization closes. Research to understand the specific requirements in your state.
Step 3: Obtain an EIN
An Employer Identification Number (EIN) is like a Social Security number for your nonprofit. It’s used for tax purposes and is required to file Form 1023, open a bank account, and hire employees.
How to Apply for an EIN:
- Visit the IRS website and complete the online application.
- Provide basic information about your nonprofit, such as its name, address, and structure.
- Receive your EIN instantly upon submission.
Did You Know?
The EIN application is free, but many organizations mistakenly pay third-party services to obtain it. Save time and money by applying directly through the IRS.
Step 4: Prepare IRS Form 1023
IRS Form 1023 is the core document for obtaining 501(c)(3) status. This application provides the IRS with detailed information about your nonprofit, including its purpose, activities, finances, and governance.
Which Version Should You Use?
- Form 1023: Required for larger organizations or those with complex operations.
- Form 1023-EZ: A streamlined option for smaller nonprofits with gross receipts under $50,000 and assets below $250,000.
What You’ll Need for Form 1023:
- A detailed description of your nonprofit’s activities and programs.
- Projected budgets for at least three years.
- Copies of your Articles of Incorporation and bylaws.
Common Mistake to Avoid:
Providing vague descriptions of your activities can lead to delays. Be specific about what your nonprofit does and how it serves its mission.
Step 5: Submit Your Application
Once your Form 1023 is complete, submit it online via Pay.gov, along with the required filing fee. The IRS will review your application to determine whether your nonprofit qualifies for tax-exempt status.
IRS Filing Fees and Timeline:
- Form 1023-EZ: $275, with a review time of 1–2 months.
- Form 1023: $600, with a review time of 2–6 months.
What Happens Next?
If the IRS has no questions, you’ll receive your determination letter confirming your 501(c)(3) status. If additional information is needed, they’ll send a “Request for Information.” Responding promptly can prevent further delays.
Step 6: Maintain Compliance
Congratulations—your nonprofit is now tax-exempt! However, maintaining 501(c)(3) status requires ongoing compliance to meet IRS regulations.
What Compliance Entails:
- File Form 990 Annually: This report provides transparency about your nonprofit’s activities and finances.
- Track Donations and Expenditures: Keep detailed records to issue accurate donor receipts.
- Stay Mission-Aligned: Ensure your activities continue to align with your stated purpose.
Pro Tip: Create a compliance calendar to track important deadlines and avoid penalties.
How InstantNonprofit Makes It Easy
At InstantNonprofit, we specialize in guiding nonprofits through every step of the 501(c)(3) process.
Why Choose Us?
- Expert Preparation: Our specialists ensure your Form 1023 is complete and accurate.
- Faster Approval: We cut IRS review times by up to 75%.
- Ongoing Support: From incorporation to compliance, we’re here for the entire journey.
Conclusion
Filing for 501(c)(3) status is a big step, but it doesn’t have to be daunting. By following these steps and avoiding common pitfalls, you can navigate the process confidently and start focusing on your mission sooner.
Ready to get started?
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