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Tax Exempt Status
Columbus, Ohio

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Tax Exempt Status

After the initial nonprofit formation steps have been completed, the new organization must still apply to the IRS for recognition of its tax-exempt status. Simply creating a nonprofit organization with the Secretary of State is not enough. Only the IRS can determine whether a nonprofit organization is tax-exempt.

Most nonprofit founders think of 501(c)(3) when they think about obtaining tax-exempt status for their organization. 501(c)(3) is actually a reference to a portion of the Internal Revenue Code, specifically, the portion that deals with charitable, religious, and educational organizations. There are actually more than 29 different types of tax-exempt status covered by Section 501(c), including:

  • Social Welfare Organizations – 501(c)(4)
  • Business Leagues – 501(c)(6)
  • Social and Recreation Clubs – 501(c)(7)
  • Fraternal Societies – 501(c)(19)

Your organization’s purpose will determine which tax-exempt status might apply.

So how does a nonprofit organization apply for recognition of its tax-exempt status?
The most common way of applying for recognition as a tax-exempt organization is under Section 501(c)(3), which is what most people think of when they think of charitable, tax-exempt organizations. If your nonprofit has been formed exclusively for charitable purposes, then you can apply for recognition of your tax-exempt status using either IRS Form 1023-EZ or IRS Form 1023. Note: Charitable has a very broad meaning and includes, among other things:

  • Relief of the poor, the distressed, or the underprivileged;
  • Advancement of religion;
  • Advancement of education or science;
  • Lessening the burdens of government;
  • Lessening neighborhood tensions;
  • Eliminating prejudice and discrimination;
  • Defending human and civil rights secured by law; and
  • Combating community deterioration and juvenile delinquency.

Section 501(c)(3) also applies to more than just charitable organizations. It also covers religious, educational, scientific, literary, public safety testing, national or international amateur sports competition, and preventing cruelty to children or animals.

What is the difference between Forms 1023-EZ and 1023?
A few years ago, the IRS rolled out IRS Form 1023-EZ as a simpler application process for smaller nonprofits to apply for their tax-exempt status. The IRS seemed to recognize that the standard application was too complex and too time-consuming (both for the organization and the IRS) for smaller organizations. The IRS continues to have a several months-long backlog to process applications for tax-exempt status, hence, the “EZ” version of the application.

The difference between the EZ application and Form 1023 is pretty significant. The EZ Application is 3 pages, and the IRS estimates that it takes the average person more than 18 hours to complete Form 1023-EZ. (It’s a short form, but you have to spend time getting your records and financial projections together, reading the instruction booklet, figuring out what the IRS is asking, and doing other research to properly answer the questions).

In contrast, the standard Form 1023 is 28 pages (and with the various narrative descriptions and attachments, the final application can easily end up being 35-45 pages or more). And the IRS estimates Form 123 will take the average person more than 105 hours to properly complete and submit! (And that doesn’t include the various schedules you may have to complete depending on how you answer the questions.)

Learn More About Applying for Tax-Exempt Status

What is a Social Welfare nonprofit organization?
Under Section 501(c)(4), organizations that are operated exclusively to promote social welfare can apply for tax-exempt status. Promoting social welfare means that the organization operates primarily to further the common good and general welfare of the people of a community. While this type of organization might be able to fit under the IRS’ definition of charitable, 501(c)(4) organizations can do something that 501(c)(3) organizations cannot: seeking legislation that is relevant to the organization’s purposes (what we typically think of as lobbying) is permissible for 501(c)(4) social welfare organizations. In fact, lobbying can even be the organization’s primary activity. However, if a 501(c)(3) organization loses its tax-exempt status because it engaged in too much lobbying, it cannot “fix” the issue by switching to 501(c)(4) status. So if part of an organization’s plans includes attempting to influence legislation, it can be extremely helpful to consider starting out as or forming an additional organization under Section 501(c)(4).

Read More About Nonprofit Advocacy: Advocacy vs. Lobbying and Using a Related Entity to Engage in Lobbying

Note: Although promoting social welfare can include seeking or opposing legislation, it generally does not include involvement in political campaigns for or against specific candidates for office.

To apply for recognition of tax-exempt status as a 501(c)(4) social welfare organization, the organization must file Form 8976 (Notice of Intent to Operate Under Section 501(c)(4)) within 60 days of the organization’s creation with the Secretary of State. Then, the organization can apply for recognition of its tax-exempt status using IRS Form 1024-A.

What about other types of nonprofit organizations?
All other types of tax-exempt status require submitting Form 1024 to the IRS to apply for recognition of tax-exempt status.

How long does it take to get a tax-exempt status determination letter from the IRS?
Unfortunately, the introduction of Form 1023-EZ has not completely solved the IRS’ backlog of applications for recognition of tax-exempt status. You can check on the current processing times on the IRS page – Where’s My Application for Tax-Exempt Status, but if you are using the traditional Form 1023, expect it to take 6 months or more to receive the determination letter.

What else should we know before applying for tax-exempt status?
Once you have determined which section of the Internal Revenue Code applies, it’s important to review the application requirements and instructions carefully. No matter what form of tax-exempt status your organization is seeking, you will need to make sure that your organization has established some basic nonprofit governance policies first, including adopting the organization’s bylaws and a conflict of interest policy. You may also need to adopt governance policies to address specific areas of risk based on your organization’s planned activities.