The Internal Revenue Service allows certain nonprofits to apply for tax-exempt status under section 501(c)(3) of the Internal Revenue Code, so the organization will not have to pay federal income taxes on individual donations and grants received in support of its charitable purpose. The application process requires the organization to fill out an application and supply the IRS with various documents to prove it will operate in the public interest and not for the benefit of any specific individual or group.
A nonprofit must be eligible for tax-exempt status under section 501(c)(3) before it can apply. There are a number of different types of nonprofit entities that can be formed under state law. Only those nonprofits formed for religious, charitable, scientific, educational, or literary purposes can qualify under this section of the code. As an initial matter, a nonprofit that wants to be tax-exempt under this section must define its charitable purpose according to one of these categories.
A nonprofit must be incorporated as a nonprofit corporation under the laws of the state where it operates and have obtained an employer identification number from the IRS to apply for tax-exempt status under section 501(c)(3). The code requires the nonprofit's articles of incorporation to include certain provisions that establish its charitable purpose, including a clause stating its mission, a clause prohibiting political activism and a clause designating a successor charity as the beneficiary of the organization's assets if it dissolves.
To apply for tax-exempt status under section 501(c)(3), the IRS requires the nonprofit to submit a copy of its governing documents, including a certified copy of its articles of incorporation or charter and any amendments and a copy of its bylaws. The nonprofit must also prove it has an adequate governing body in place by submitting the names and addresses of its board of directors.
The nonprofit must submit IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and Notice 1382, Changes for Form 1023, to be considered for tax-exempt status under section 501(c)(3). The application must be accompanied by the applicable application fee.
Form 1023 requests basic information about the nonprofit, but also requires it to prove it plans to conduct charitable activities and be publicly-supported. The nonprofit must provide a description of planned activities and the personnel expected to run them. Also, the nonprofit must present a three-year fundraising plan that shows the organization will be supported by donations and grants from public sources.
- FindLaw: How to Form a 501(c)(3) Nonprofit Corporation
- IRS Publication 557: Tax-Exempt Status for Your Organization
- Citizen Media Law Project: Application for 501(c)(3) Tax Exemption
- American Bar Association: Model Nonprofit Corporation Act
- IRS.gov: Instructions for Form 1023 - Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code