Want to apply for 501(c)(3) status? Learn how to attain tax exemption status by following these steps.
501(c)(3) status gives charitable organizations tax advantages on the federal and state level. However, applying for tax-exempt status can be daunting, especially if you don’t know where to begin.
We compiled a step-by-step procedure to help you apply for tax exemption, including key forms you need to complete and where to file them. You’ll also discover how board management software powers effective meetings after obtaining 501(c)(3) status.
What Is a 501(c)(3)?
Organizations with tax-exempt status, such as public charities and private foundations, are commonly known as 501(c)(3) organizations. The term 501(c)(3) refers to section 501(c)(3) of the IRS code, which outlines the rules controlling tax-exempt organizations.
A 501(c)(3) organization enjoys various tax benefits. You won’t pay federal income tax and may be eligible for state tax exemption. This tax advantage allows for diverting more resources to help accomplish the organization’s mission.
However, the 501 (c)(3) status comes with responsibilities. You must keep detailed records and file tax returns annually with the IRS to prove the organization complies with tax rules.
How to Apply for 501(c)(3)
Registering your mission-driven organization doesn’t automatically give you tax-exempt status. You must apply for federal and state tax exemption. The application process varies by state. Visit the National Association of State Charity Officials (NASCO) for a complete breakdown of state-by-state application rules.
Here’s a step-by-step procedure to apply for 501 (c)(3).
1. Review State and Local Requirements
Being federally approved for tax exemption might not be enough for the state to recognize your organization as a 501(c)(3). Some states have additional tax-exemption requirements. Make sure to research your state’s requirements in order to be recognized as a tax-exempt organization.
You must first form a nonprofit before applying for the 501(c)(3) status, typically a corporation, unincorporated association, or trust. Each entity includes different formation procedures and organizational rules that vary by state.
Additionally, your state may specify board of directors requirements, specifically the minimum number of board members. In most cases, you’ll need at least three directors to fill vital nonprofit board positions. Ensure you comply with all state and local requirements to avoid delays or rejection when applying for 501(c)(3) status.
2. Partner with a Registered Agent
Think of a registered agent as the link between your organization and the state. The agent can be an individual or an agency that receives tax and legal communication on your nonprofit’s behalf.
The requirements for registered agents vary by state. But most require agents to hold a physical address in the state (if you partner with an agency) or residency in the state (if your agent is an individual).
3. Complete Initial Registration and Reporting Requirements
To apply for tax-exempt status, you must file formation documents to establish your nonprofit as a legal entity. Most states require filing Articles of Incorporation, a legal document describing an organization’s basic structure. It includes your organization’s name, purpose, directors, registered agent, and more.
You can obtain the document from your state’s website and file it online, via email, or in-person. Additionally, you can file Articles of Incorporation with the Secretary of State, the Attorney General, or a specified state agency. Expect to pay a filing fee that varies by state.
After the initial registration, you will need an Employer Identification Number (EIN). The IRS will use it to identify your business and monitor your tax account. You will use your EIN to apply for 501(c)(3) status and file annual tax statements with the IRS. You can obtain your EIN online. Alternatively, fill out the EIN form and mail or fax it to the IRS.
Your organization must meet IRS requirements to be exempted from federal taxes. If you’re eligible, there are two IRS forms to apply for the 501(c)(3) status: Form 1023 and Form 1023-EZ. If you’re wondering which one you should use, see these IRS instructions.
After filing the right tax-exempt form, file your application online on Pay.gov. You will pay a user fee depending on the Form—1023 ($600) and 1023-EZ ($275).
If the IRS approves your application, you obtain federal tax-exempt status. In some states, federal tax exemption automatically qualifies you as a 501(c)(3) at the state level. Others require you to apply for state tax exemption.
4. Complete Annual Filing Requirements
To maintain the 501(c)(3) status, you must file tax returns annually with the IRS using Form 990. It’s a four-section document summarizing a nonprofit’s cause, income, expenses, and assets.
The IRS will revoke your tax-exempt status if you don’t file the annual tax forms. Other factors that threaten your tax-exempt status include:
- Running the organization for private benefit
- Not filing tax returns for three consecutive years automatically cancels the tax-exempt status
- Participating in other activities outside the organization’s mission
How OnBoard Powers Effective 501(c)(3) Organizations
Nonprofits today often use board management software to automate processes, enhance communication, improve security, among other benefits.
With OnBoard meeting software, you’ll never worry about how to prepare for a board meeting. Our platform improves collaboration before and during your board meetings to help take your nonprofit to the next level. Put simply, OnBoard acts as a central platform for all board activities.
You can use OnBoard to create, store, and distribute board materials. Virtual offerings allow board members to meet from anywhere, while leaders can use tools like the Agenda Builder to create customized templates.
Need some assistance planning a nonprofit board meeting? Download our free Board Meeting Agenda Template today.
Frequently Asked Questions
How Long Does 501(c)(3) Approval Take?
It depends on the IRS form you use to apply for tax-exempt status. Processing Form 1023 takes about six months, while Form 1023-EZ takes about a month. The IRS processes applications in the order they’re received.
How Long Does It Take to Get a 501(c)(3) Determination Letter?
Getting a determination letter takes about two months or longer. Missing crucial documents delays processing your 501 (c)(3) request and might even lead to a denied application.
How Difficult Is It to Apply for 501(c)(3)?
It's fairly easy if you follow a simple and detailed application procedure. You need to know your state's tax-exempt requirements, partner with a registered agent, complete initial registration, and file the right IRS (and state) forms.
About The Author
- Gina Guy is an implementation consultant who specializes in working with nonprofit organizations get the most from their board meetings. She loves helping customers ease their workloads through their use of OnBoard. A Purdue University graduate, Gina enjoys refinishing furniture, running, kayaking, and traveling in her spare time. She lives in Monticello, Indiana, with her husband.
- Board Management Software2022.12.02What is a Nonprofit Treasurer? (Overview, Roles, and Responsibilities)
- Board Management Software2022.11.308 Nonprofit Fundraising Ideas (Updated 2023)
- Board Management Software2022.11.21501(c)(3) vs. 501(c)(4): What’s the Difference?
- Board Management Software2022.11.17How to Start a Nonprofit in Virginia (Step-by-Step Guide)