How to Obtain 501(c)(3)Status

September 24, 2019

Are you a newly formed nonprofit organization looking to obtain 501(c)(3) status? Below are a few tips on how to help your organization.

What exactly is a 501(c)(3) nonprofit organization?

  • Most nonprofits are 501(c)(3) organizations, which means they are formed for religious, charitable, scientific, literary, or educational purposes and are eligible for federal and state tax exemptions on funds that are raised.
  • Your donors may also be able to write off any charitable donations come tax season.

1. First, you need to form an Alabama nonprofit corporation.
Forming a nonprofit corporation is like forming any other corporation and you should seek out the services of an experienced corporate attorney before you begin. An attorney will help you reserve a name, draft Articles and write By-Laws which are specifically tailored to your organization.

2. Obtain your tax identification number.
Obtain a tax identification number from the IRS. This is called the Federal Employer Identification Number (EIN), and it functions as a social security number, but for a business or other legal entity. You’ll need the EIN to open business bank accounts and to complete Form 1023. Apply for your EIN by filing Form SS-4, Application for an Employer Identification Number.

3. File your Form 1023 federal tax exemption application.
To obtain federal tax-exempt status from the IRS, you will need to complete and file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This long and detailed form asks for detailed information about your organization, including its history, finances, organizational structure, governing policies, operations, activities, and much more.

Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This is a much simpler, shorter form that may be filed online. Only smaller nonprofits - those with projected annual gross receipts of less than $50,000 and total assets of less than $250,000 - are eligible to use the streamlined 1023-EZ application. (See the IRS website for more information on the Form 1023 and Form 1023-EZ filing requirements.)

*NOTE: It is recommended that you utilize the services of an experienced tax attorney or CPA to assist with filing Forms 1023 or 1023-EZ.

4. Be prepared to wait.
The time between filing the proper forms and receiving a letter of determination may vary widely. The IRS uses a specific method for screening these applications, and many things can delay processing, such as issues with the application itself, government shut-downs, or any other event that results in a backlog of applications. It’s possible to request an expedited process if you’ve been offered a grant that’s contingent upon 501(c)(3) status. In other words: be prepared to wait.

5. May I accept donations before I receive my 501(c)(3) status?
You may find donors that wish to contribute to your nonprofit, but you’re not yet in possession of an acceptance letter. This is acceptable as long as you disclose to potential donors that your 501(c)(3) status is pending. If they still decide to make a charitable donation, they’re assuming the risk of the determination letter not coming through. If your application is approved up to 27 months after incorporating, your 501(c)(3) status will be retroactive to the incorporation date.

Obtaining 501(c)(3) status may seem daunting, but it doesn’t have to be. The process will help you to create plans and a structure that will set your organization up for long-term success. Contact one of the attorneys at Isom, Stanko, & Senter, LLC at (256) 474-2886 and let us help your nonprofit succeed!