Most nonprofit organizations must apply to the Internal Revenue Service to qualify as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code, 1986. Once an organization is approved and recognized as tax-exempt, it will receive a determination letter from the IRS describing its tax-exempt status and qualify to receive tax-deductible charitable contributions.
The IRS has provided two application processes for this purpose – Form 1023, or the much simpler Form 1023-EZ. In this post, we will discuss the features and eligibility requirements for each of the applications.
Form 1023-EZ
Form 1023-EZ is simpler and more convenient and consists of 5 parts spread over 3 pages. It contains questions about the details of the nonprofit organization, its officers and directors, and its organizational structure. It also asks questions regarding the specific activities and classification of the nonprofit organization.
Eligibility
The instructions for Form 1023-EZ provide an eligibility worksheet to help determine if a nonprofit is eligible for this form. The main eligibility criteria are as follows:
- Projected annual gross receipts must not exceed $50,000 in any of the next 3 years
- Actual annual gross receipts must not have exceeded $50,000 in any of the past 3 years
- Total assets must not exceed $250,000
- The organization must not be a foreign organization, LLC, successor to a for-profit entity, church, school, or hospital
- The organization must not request classification as a supporting organization or a private operating foundation
- The organization must not maintain or plan to maintain one or more donor-advised fund
Submitting the Application
Form 1023-EZ can be filed electronically on the Pay.gov website. Applicants must pay a filing fee (currently $275) through Pay.gov when the application is filed. Currently, the IRS takes approximately two to four weeks to process applications submitted on Form 1023-EZ.
Form 1023
Form 1023 is a long-form document consisting of 11 Parts and 8 Schedules (A to H). The form requires details about the nonprofit organization, its organizational structure, its officers and directors, a description of its activities, and financial information. Depending on the type of activities, the organization may also be required to complete one or several Schedules. Additionally, this form requires applicants to submit several supporting documents that provide more information about the organization, such as the articles of incorporation, bylaws, the conflict of interest policy, and actual or projected financials for 2-3 years.
Eligibility
All nonprofit organizations organized and operating exclusively for religious, charitable, scientific, literary or educational purposes can apply for federal income tax-exempt status using Form 1023. Certain other activities are prohibited or restricted, including, but not limited to, the following. A section 501(c)(3) organization must:
- Absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office;
- Ensure its assets and earnings do not unjustly enrich board members, officers, key management employees, or other insiders;
- Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially;
- Not operate for the primary purpose of conducting a trade or business that isn’t related to its exempt purpose(s);
- Not engage in activities that are illegal or violate fundamental public policy; and
- Limit its legislative activities.
Submitting the Application
Form 1023 can be filed electronically on the Pay.gov website. Applicants must pay a filing fee (currently $600) through Pay.gov when the application is filed. Currently, the IRS takes as little as three months or as long as twelve months to process applications submitted on Form 1023.
Timing Is Key
A nonprofit organization should file Form 1023 or 1023-EZ within 27 months after the end of the month in which it was legally formed. Once approved, the effective date of the exempt status is the legal date of formation of the organization. If filed after 27 months, the date the form is filed is the effective date of the organization’s exempt status.
How We Can Help
We can help you determine which form is most appropriate for your organization and help you file for 501(c)(3) exemption. While Form 1023-EZ may be much simpler, it may not always be the most appropriate. Many organizations that file Form 1023-EZ are ineligible for 501(c)(3) status even if approved by the IRS, potentially causing legal issues down the road. You should consult with a tax professional and/or an attorney before deciding which form is best for your organization.