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Tax Exempt Status for Non-Profits

By: Tax Hotline
Summer 2022 (Vol. 40, No. 2)

To be tax-exempt under Section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for any of these purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.

If you’re thinking about starting a nonprofit and want to apply for tax-exempt status under Section 501(c)(3) of the tax code, you’ll need to use a Form 1023-series application. Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Here are seven key items to know about this process:

  1. Form 1023-series applications for recognition of exemption must be submitted electronically online at Pay. gov. The application must be complete and must include the user fee.

  2. Some organizations may be able to file Form 1023-EZ, a streamlined version if they meet certain criteria such as projected or past annual gross receipts of $50,000 or less for a period of three years.

  3. Some types of organizations don’t need to apply for Section 501(c)(3) status to be tax-exempt. These include churches and their integrated auxiliaries, as well as public charities whose annual gross receipts are normally less than $5,000.

  4. Every tax-exempt organization should have an Employer Identification Number (EIN) regardless of whether the organization has employees. An employer identification number is an organization’s account number with the IRS and is required for the organization to apply for tax-exempt status. You can get an EIN at no cost by applying online at IRS.gov.

  5. The effective date of an organization’s tax-exempt status depends on their approved Form 1023. If they submit this form within 27 months after the month they legally formed, the effective date of their organization’s exempt status is the legal date of its formation. If they file after 27 months, the effective date of its exempt status is the date it files Form 1023.

  6. Once the IRS determines an organization qualifies for tax-exempt status under the law, it will also be classified as a private foundation unless the organization meets the requirements to be treated as a public charity. Generally, organizations classified as public charities receive contributions from many sources, including the general public. In contrast, private foundations typically have a single major source of funding.

  7. A charitable organization must make certain documents available to the public. These include its approved application for recognition of exemption and its last three annual information returns.

Churches, synagogues, mosques, and other places of worship are automatically considered tax exempt by the IRS (as long as they meet certain requirements), without filing for recognition of 501(c)(3) status officially. The IRS has a formal list of attributes associated with churches. The list sounds a little daunting but most places of worship already have these characteristics. For example, a church needs to have “distinct legal existence” that just means the church needs to be incorporated as an entity with your state. However, it is common for these organizations to still apply for 501(c)(3) status, even though they aren’t legally required to do so. There are a few reasons for this:

  • Having 501(c)(3) status assures your congregation and donors that the church is recognized officially by the IRS as legitimate and tax-exempt, thus guaranteeing their donations and tithes will be tax deductible.

  • 501(c)(3) status increases the transparency of the organization, as the church will then be required to file a tax return (called IRS form 990) each year. Those forms are available to the public, again, ensuring donors know that their money is being used in a charitable way. For churches who provide programming like missions work or children’s programs, this transparency can be a great way to let donors know that their contributions are going to a worthy cause.

  • 501(c)(3) organizations are given a variety of discounts and benefits. Many companies have programs that discount their services or products for established nonprofits like churches, but require 501(c)(3) status to ensure the legitimacy of the organization. The US Postal Service also offers discounted rates for mailing and postage for established 501c3 organizations.

  • Some states provide additional tax exemptions for established 501(c)(3) organizations like exemption from state sales tax or state employment tax. These tax exemptions can help churches spend more of their funding on their religious services and programs, rather than on taxes.