Nonprofit Start-Up Series Step 2: Apply for Tax-Exempt Status

Establishing a nonprofit corporation is only the first of many steps required to create and operate a legal nonprofit organization. The next step is filing for federal tax-exempt status.

Tax-exempt status is one of the most important steps in the formation of a nonprofit. The IRS alone determines a nonprofit organization’s exempt status. Once recognized as tax-exempt by the IRS, the organization is not required to pay federal and (in many cases) state corporate income taxes. Without obtaining tax-exempt status, an organization is responsible for corporate taxes at both the federal and state level—even if incorporated as a nonprofit corporation.

Depending on the type of tax-exempt status issued by the IRS, donors may also claim donations to the organization as tax-deductible gifts on their personal or business tax returns. Tax-deductible contributions are a key part of nonprofit fundraising, which we’ll discuss in more detail in Step 3 of this series.

There are several types of tax-exempt status. The most common form is a 501(c)(3) organization. The majority of nonprofits fall under this classification, which includes charitable, religious, educational, scientific, and literary organizations. However, other types of tax-exempt status exist depending on the organization’s purpose. Examples include:

• 501(c)(4):Social welfare and advocacy organizations
• 501(c)(6):Business leagues and chambers of commerce
• 501(c)(10):Fraternal societies

These are just a few of the 29 types of nonprofit designations currently recognized by the IRS. Understanding which classification applies to your organization is a crucial step in filing for the correct type of tax-exempt status.

Once you identify the appropriate classification, applying for tax-exempt status with the IRS is a time-consuming and detail-oriented process. There are multiple application forms, depending on your organization’s size and type:

• Form 1023-EZ:Short form, eligible for smaller 501(c)(3) nonprofits
• Form 1023 (Standard):Long form for larger or more complex 501(c)(3) nonprofits
• Form 1024:Used for other 501(c) types such as 501(c)(4), 501(c)(6), etc.

As of 2025, the IRS has revised Form 1023-EZ to require additional information, including a brief narrative of the organization’s activities and clarification on financial thresholds. These changes are designed to improve the accuracy of the determination process and may affect eligibility. Organizations must also now complete an expanded eligibility worksheet as part of the application.

Applications can range from 10 to 40+ pages, often with attachments including a narrative of activities, financial projections, and bylaws. The average applicant spends 8 to 10 hours completing the IRS tax-exempt application.

After an organization submits its application, IRS processing times vary:

• Form 1023-EZ:Typically processed within 3–8 weeks
  
• Form 1023 (Long Form):Average processing time is 5–7 months
  
• Form 1024:May take 6–8 months or longer, depending on complexity

Note: These timelines apply to submissions that are complete and accurate. The IRS may reject or return substantially incomplete applications. If returned, the organization must correct and resubmit the application, which can delay the process.

While waiting for a determination letter, an organization may operate as a nonprofit. However, soliciting donations could be restricted depending on the state’s charitable solicitation laws, which we’ll cover in Step 3.

Once approved, the IRS sends a Letter of Determination via USPS. This document confirms an organization’s federal tax-exempt status and includes its classification and effective date. It is one of the most important documents a nonprofit will receive. Copies may also be available on the IRS website several months after issuance, but organizations should retain the original for their records.