What is a 501c3?

501c3 is an IRS designation identifying tax-exempt organizations. Receiving 501c3 status requires an organization to engage in charitable activities. 501c3 is often used to refer to nonprofits as a whole, but not all nonprofit organizations receive 501c3 status.

What is 501c3 status?

501c3 status identifies tax-exempt nonprofit organizations. Charitable organizations with 501c3 status do not pay federal taxes, and individual donations are tax-deductible. 

Are 501c3 organizations tax exempt?

501c3 organizations are exempt from federal taxes, and donations are tax-deductible. However, the organization may still need to pay state and local taxes.

How do I apply for nonprofit 501c3 status?

Applying for 501c3 tax-exempt status requires filing IRS Form 1023 or 1023 EZ. The EZ form has rigorous requirements based on donations and types of organizations. Specialized organizations, such as churches or schools, cannot file the EZ form.

Can 501c3 organizations lobby?

Nonprofit organizations are generally prohibited from lobbying or engaging in political activities. A 501c4 organization can spend unlimited time lobbying and is often a better choice for politically active nonprofit organizations.

Can a 501c3 pay employees?

501c3 organizations can have paid employees like any other corporation. Employees with high salaries must be disclosed on the annual report, and organizations must still pay employment taxes.

When are 501c3 taxes due?

501c3 organizations are exempt from federal taxes. However, they must still file Form 990 with the IRS each year. This annual report is due on the 15th day of the 5th month after a nonprofit’s fiscal year ends. Typically, this is the 15th of May for organizations with a fiscal year ending on December 31.

What can 501c3 funds be used for?

Funds raised by a 501c3 nonprofit organization can be used to operate the business’ charitable purpose. This includes providing services, paying employees, renting space, and more. 

Why become a 501c3?

A 501c3 nonprofit organization is exempt from federal taxes and can solicit tax-deductible donations. Additionally, a 501c3 nonprofit is eligible for tax-deductible corporate sponsorships and grant funding.

How do I start a 501c3?

Starting a 501c3 organization requires incorporating a company in your state, establishing a legal Board of Directors, and applying for 501c3 tax-exempt status. Depending on your state, there may be other requirements, such as filing a charity registration.

How do I apply for 501c3 status?

Incorporated nonprofit businesses can apply for 501c3 tax-exempt status by filing IRS From 1023 or 1023 EZ. The EZ form has particular requirements based on the type of organization and annual revenue. 

Are 501c3 records public?

501c3 nonprofit organizations are public charities and must have public records. The IRS publically publishes 990 annual reports once received, and organizations must provide other financial records to the public if requested. 

What form is used to apply for 501c3 tax exemption?

Incorporated nonprofit businesses can apply for 501c3 tax-exempt status by filing IRS From 1023 or 1023 EZ. The EZ form has particular requirements based on the type of organization and annual revenue. 

What types of organizations will qualify for 501c3 tax exemption?

Nonprofit companies organized for charitable purposes are eligible for 501c3 tax-exempt status. These include religious, charitable, scientific, testing for public safety, literary, educational, fostering amateur sports, or preventing cruelty to children or animals.

How long with the IRS take to make a determination?

The IRS can take anywhere from 6-9 months to make a 501c3 determination. Filing a 1023 EZ application has a much quicker review process for organizations that qualify. 

What is the definition of “charitable?”

According to the IRS, “the term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; 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.”

What do I need to be considered a church?

Nonprofit organizations seeking designation as a church must demonstrate distinct religious beliefs, a place of worship, regularly scheduled services, and an established and active congregation.

Do sports team quality for 501c3 exemption?

Fostering national and international amateur sports is an exempt purpose for 501c3 nonprofit organizations. However, the organization must also be focused on providing education (e.g., teaching youth how to play), be affiliated with an educational organization like a school, promote youth development, or involve international training without procuring facilities or equipment (e.g., Olympic athletes).

What are Articles of Incorporation?

Articles of Incorporation is a document that establishes a nonprofit organization as a legal entity within the state. This is the first document created in forming a nonprofit organization.

What are Articles of Organization?

Articles of Organization are similar to Articles of Incorporation but used when establishing an LLC.

What are Bylaws?

Bylaws are the governing document that establishes how a nonprofit organization operates. The IRS has specific requirements that must be included in the Bylaws for a 501c3 tax-exempt nonprofit.

What type of financials are necessary for the application?

Establishing a projected budget is vital for every nonprofit organization. Depending on the type of 501c3 application (1023 or 1023 EZ), up to five years of budget information may be required to apply for tax-exempt status.

Can my organization charge for goods or services?

Nonprofit organizations can charge for goods and services that align with their exempt purpose. In general, fees should be less than similar commercial options in the area. Any fees charged for goods or services outside the organization’s exempt purpose may be subject to unrelated business income taxes (UBIT).

What is the “organizational test?”

The “organizational test” is how the IRS determines a 501c3 tax-deductible organization. The test ensures that the Bylaws and Articles of Incorporation restrict operations to the organization’s exempt purpose. Additionally, the organizational test establishes how assets are distributed should the nonprofit dissolve and ensures no one financially benefits from the organization’s operation.

What does the Board of Directors do?

The Board of Directors oversees the operation and compliance of the nonprofit organization. The Board may directly facilitate programming and direct services in smaller organizations. The Board may hire and manage people in larger organizations to operate these functions.

How many people do I need on my board?

Every nonprofit organization requires at least three board members. The Board has three required roles (President, Treasurer, and Secretary) that unique individuals must fulfill.

Can I put family members on my organization’s board?

The majority of a nonprofit organization’s Board of Directors must be unrelated. Family members can serve on a board, but unrelated individuals must outnumber them. For example, a husband and wife can sit on a board if three additional unrelated individuals are on the same board.

My organization grants scholarships. Can my children be recipients?

It’s never a good idea to show favoritism and give scholarships to members of the board, award committee, or their family members.

What filings are required each year once I’m approved?

501c3 tax-exempt nonprofit organizations must file a Form 990 Annual Report with the IRS each year. Additional filing requirements vary by state but generally include annual reports, charity registration renewals, and sales tax-exemption renewals.

What is Charitable Organization Registration?

Most states require nonprofit organizations to file a charity registration before asking for funding or donations. The process depends on your state but usually includes filing with the Attorney General or Department of Consumer Services.

Is state tax exemption required?

501c3 status exempts organizations from federal taxes but not from state taxes. Filing for state tax exemption removes an operational burden and ensures that more funds are available for the organization’s exempt purpose.

If my 501c3 is approved, do I still have to pay state income tax and sales tax?

501c3 status does not exempt organizations from state and local taxes. Most states provide a process for exemption from franchise and sales taxes, though some state and local taxes (like property or employment) may still be required.