If you founded or plan to found a charitable organization, you may be looking for the best ways to finance your operations. You might also wonder how you can qualify for tax-exempt status. Although the process can be long and tedious, qualifying as a 501(c)(3) organization can provide several benefits for your entity.
Some of these benefits include:
- Tax-exempt status. If the IRS classifies your organization as a 501(c)(3) organization, you will not need to pay federal income taxes. It may be exempt from state or local income, sales, and/or property taxes as well.
- Tax-deductible donations. To encourage people to donate to charitable organizations, the government offers tax deductions to people who donate to 501(c)(3) organizations. Due to this incentive, you will likely raise the funds you need more easily.
- Alternative financing. 501(c)(3) organizations have exclusive access to certain public and private grants. By forming your nonprofit and applying for 501(c)(3) status, you may become eligible for these grants and other tax-exempt forms of financing.
501(c)(3) Requirements: Charitable Purpose & Public Benefit
Before acquiring recognition as a 501(c)(3) organization, you will need to meet certain requirements and demonstrate your organization’s charitable purpose and public (rather than private) benefits.
To qualify for tax-exempt status under Section 501(c)(3), your organization must operate exclusively for at least one of the following reasons:
- Religious, charitable, scientific, literary, or educational purposes
- Public safety testing
- Promotion of amateur sports competitions
- Animal cruelty prevention
If your organization influences legislation (or will attempt to do so), these lobbying efforts cannot amount to a significant portion of your organization’s activities. Additionally, the government prohibits 501(c)(3) organizations from participating or intervening in any political campaign for or against any public office candidate. If your organization is or will become heavily involved in political activities, 501(c)(3) classification may not be right for you.
Furthermore, your organization must benefit the public instead of private interests. Even if your organization is charitable, it will not qualify for tax-exempt status under Section 501(c)(3) if it operates to benefit private interests or has a net income that benefits a private individual.
Preparing for Your Application Process
If you meet the above requirements, you will need to complete a few legal processes before applying for 501(c)(3) status.
A non-profit organization must take one of the following forms to qualify for federal income tax exemption:
- Limited liability company
- Unincorporated association
Additionally, your Certificate of Articles of Incorporation is crucial for your organization’s eligibility. The Articles of Incorporation should specify your organization’s exempt purpose (e.g. charitable, religious, educational, scientific, etc.), as well as a provision stating that, upon dissolution, the organization’s remaining assets will be used exclusively for exempt purposes.
IRS Form 1023 is the application for 501(c)(3) status. It will ask you to attach a current copy of your organization’s by-laws. Be sure your organization’s by-laws are consistent with statements in your Articles of Incorporation and reflect that you formed your entity for exempt purposes only.
Adopting a conflict of interest policy is highly recommended as well. The IRS does not strictly require this, but certain states do.
If you need help navigating Form 1023 and applying for tax-exempt status, give SIMPLYLEGAL a call at (305) 676-9328 today. We can help you put everything in place to ensure the highest possible likelihood of success.