How to Start a 501(c)(3)
501(c)(3) is federal income tax exemption for qualified charitable nonprofits. The application for 501(c)(3) exemption is made by filing Form 1023 or Form 1023-EZ with the IRS. Obtaining this exemption is the most difficult part of your nonprofit paperwork. The IRS estimates that it will take over 100 hours to prepare and file the Form 1023. Fees for the federal application for tax exemption range from $275 - $600. In the end, this is the only way to obtain federal tax exemption and the credibility of operating a nonprofit organization with 501(c)(3) status.
Before you start the application, make sure you:
- Incorporated your nonprofit organization at the state level as a nonprofit corporation.
- Limit the purpose of the organization to exempt activities (charitable, educational, religious) allowed under Section 501(c)(3).
- State in your articles of incorporation and/or bylaws that the organization will not engage in restricted activities such as participating in political campaigns, lobbying, or allowing earnings to benefit private individuals or interests.
When you are filing for federal tax exemption, it is ideal to file within 27 months of forming your nonprofit corporation. Applying at some point beyond those 27 months will require additional information and documentation with your federal application.
Applying for tax exemption under Section 501(c)(3) is done utilizing the Form 1023 or Form 1023-EZ. If you meet detailed criteria outlined by the IRS, you may qualify to complete the Form 1023-EZ, an online application with a filing fee of $275. If you do not meet the criteria for the Form 1023-EZ or you prefer to complete the longer form, you will file the Form 1023. This application comes with a filing fee of $600. By the time you have assembled this application, your submission package will include:
- Application Form 1023 and additional Schedules A through H, as required
- Articles of incorporation and any amendments
- Bylaws
- Conflict of interest policy
- Documentation of nondiscriminatory policy for schools, as required
- Form 5768 - Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation (optional)
- Form 2848 - Power of Attorney and Declaration of Representative (optional)
- Form 8821 - Tax Information Authorization (optional)
- Expedite request (optional)
- Any other attachments
- User fee
It is not unusual for the Form 1023 application and attachments to exceed 50 pages. Be careful to ensure that you’ve included everything that it is required and followed IRS formatting instructions. IRS processing times may take anywhere from 2 weeks to 6 months, so be patient.
Key Takeaways:
- The Form 1023 or Form 1023-EZ is used to apply for 501(c)(3) federal tax exemption from the IRS.
- Preparing the applications can be complex and include filing fees ranging from $275 - $600.
- A complete application may be long and must include all of the IRS required documents and language in order to be approved.
