How to File a 501(c)(3) Tax Exempt Non-Profit Organization

Filing Tips for Nonprofits 501c3By definition, nonprofit corporations—also called nonprofits, nonprofit organizations, NPOs or not-for-profits—are formed exclusively for the purpose of providing a “public benefit”.

Because nonprofits are designed not to make money for the owners or shareholders, these organizations receive special treatment under the law. They may even qualify for tax-exempt status.

501(c)(3): the Key to Tax-Exempt Status for Non-Profits

Some erroneously believe that just by incorporating a nonprofit, the resulting organization is automatically tax-exempt. In actuality, incorporating a nonprofit simply establishes it in the state where it was incorporated. In order to become a tax-exempt nonprofit, one must file for tax-exempt status. This is a difficult process and professional help is often recommended.

The most common way to become a tax-exempt nonprofit is by establishing the organization as a Section 501(c)(3) entity. These are public charities and private foundations that are created for religious, educational, charitable, scientific, literary, safety-oriented or amateur sports-related purposes. There are also a number of other types of organizations considered tax-exempt by the IRS, but not charitable. These may include trade associations, social clubs and certain advocacy organizations involved in political lobbying.

Once you file your organization’s tax-exempt status request with the IRS you must wait on the tax collection agency’s approval.

Incorporate First Before Applying for Tax-Exempt Status

Like for-profit corporations, nonprofits must be established with the state. Once that is approved, the nonprofit can then start the process of applying for tax-exempt status.

The formation process for nonprofit and for-profit corporations is similar. You must choose a business name, file the articles of incorporation, appoint a board of directors and designate a registered agent. The exact steps will vary from state to state. Some states have different rules for naming nonprofits, while others require you to choose your board of directors before filing your incorporation articles.

From the beginning, it’s essential that the paperwork be prepared with the goal of acquiring tax-exempt status. The formation documents must specifically state that the organization has an exempt purpose, whether it’s religious, educational, charitable, scientific, literary, safety-oriented or amateur sports-related. In addition, the formation papers must show that the organization meets the 501(c)(3) requirements for disposition of assets in the event the nonprofit is terminated.

Merely stating the purpose or plan for the final distribution of assets in the bylaws or operating agreement is not sufficient. These must be listed in the formation documents; otherwise the documents will have to be amended before you can apply for tax-exempt status.

Once the formation documents are correct, requesting tax-exempt status requires the completion of IRS Form 1023, Application for Recognition of Exemption.

Ideally Form 1023 should be filed within the first 27 months after forming the entity with the state. Filing within this timeframe allows you to retroactively apply your tax-exempt status back to the date of incorporation or formation.

Filing after the 27-month window only allows you to apply the tax-exempt status back to the date of your application.

Organizations that have assets of $250,000 or less and annual gross receipts of $50,000 or less should file Form 1023–EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

Additional 501(c)(3) Requirements for Establishing a Nonprofit as Tax-Exempt

Before applying for exempt status, the organization must have an employer ID number (EIN) secured for tax and banking purposes. This is required whether or not the organization has any employees.

Nonprofits are also required to submit financial statements and other information—including the salaries of directors, officers and key employees—to the IRS. If the organization’s name has been legally changed by an amendment to its organizing documents, an exact copy of that amendment must also be attached to the application.

Ensuring Your 501(c)(3) Also Has Tax-Exempt Status at the State and Local Level

After your organization gets approval at the federal level, you'll need to ensure your organization is also considered tax-exempt at the state and local levels. This prevents the organization from having to pay state corporate income tax, sales tax or property tax.

Requirements vary by state. Sometimes the IRS recognition is all the organization needs to be approved at the state level.

Remember: just because the organization is tax-exempt does not mean you don't have to comply with local regulations, including building codes. Working with a trusted legal partner ensures you have all the permits and licenses required to operate your business without concern of penalty. 

Ongoing Requirements

To ensure the organization doesn’t lose its tax-exempt status, it must continue to operate under the purposes that were listed in its application. The organization must also comply with state requirements for filing annual reports and maintaining a registered agent.

If an organization does not file its required annual return or files late, the IRS may assess penalties. If the organization does not file the annual report as required for three consecutive years, it will automatically lose its tax-exempt status.

Additional ways to lose tax-exempt status include allowing income or assets to benefit insiders including directors and board members and participating in political campaigns. For additional ways to lose status see this guide from the IRS.

Finally, if the organization changes directors a company management amendment must be filed with the state to ensure there is no change in taxing status.