501c3 nonprofit organizations are a common entity type. Charities that fall under this category are exempt from paying federal income tax. If your organization meets the qualifications, obtaining this classification could help your organization save money.
Types of 501c3 Nonprofit Organizations
A variety of charities fall into the category of 501c3. The organization must provide one of the following purposes:
- Scientific
- Charitable
- Religious
- Fosters amateur sports competition
- Testing for public safety
- Prevention of cruelty to children
- Prevention of cruelty for animals
Parent teacher associations, churches and charitable hospitalsalso fall into this category. Chapters of the Red Cross and the Salvation Army are also 501c3 organizations. Donations to recognized 501c3 organizations are tax deductible for the donor.
Organizations falling into this category must not provide a benefit of private interests. The earnings from the organization must not benefit any private shareholder or individual. The IRS also limits the amount of lobbying these organizations can do within the political and legislative sector.
Applying for Recognition as a Nonprofit Organization
In order to apply to the IRS for recognition as a nonprofit organization under 501c3, organizations must work through several steps. The Internal Revenue Service website provides additional information. Some steps include:
The first step is to ensure the organization has an appropriate legal form. The organization must be a corporation, association or a trust.
The organization must have an exempt purpose. A full list of exempt purposes for organization is available at the Charities and Nonprofits website of the IRS. Examples include social welfare organizations, political organizations and veteran's benefits organizations.
Submit an application, signed and dated appropriately, with the user fee to the IRS. Form 1023, Application for Recognition of Exemption is available online or at local IRS offices. Most organizations will need to complete Form 1024, Application for Recognition of Exemption Under Section 501a.
- Provide the employer identification number of the organization to the IRS.
- Provide copies of all documents requested including the organization's organizing documents.
- The organization should have existed for at least three years.
- Provide all financial statements for the organization for the last three years, including all revenue and expenses.
The application contains important legal information. It is a document the IRS will use to determine if the organization qualifies for exemptions, but can also be used as legal evidence in a case of fraud, should you violate the terms of your agreement. Hiring an attorney to help you complete the application is advisable.
Once you submit this information to the IRS, usually through a mailed in application, you will need to wait for the IRS to grant this exemption. This can take several weeks depending on the number of applications the IRS is processing.
Starting a Nonprofit
For those planning to start a 501c3 nonprofit organization, the first step is to understand the types of organizations falling into this category. Hiring an attorney to help the organization to obtain this recognition is important in most situations.
The nonprofit organization must formulate a mission statement and form a board of directors. After doing this, the organization must then file Articles of Incorporation, which is an official statement of the creation or the organization. File this with the appropriate state agency. From there, the organization must dray bylaws, or the rules, showing how the organization operates.
In addition to these steps, develop a budget and record keeping system. File for and obtain an employer identification number. Only after you complete these steps can you then file for 501c3 status with the IRS.
It may also be possible for the organization to file for state and local tax exemption as well. This may reduce the income, property and sales tax the nonprofit has to pay. To file for these exemptions, contact the state's Department of Revenue as well as local tax departments. These savings can help to ensure the nonprofit organization has the ability to retain as much money as possible to use towards the benefit of the organization's goals.
