Starting a New Nonprofit

501(c)(3) Status

501(c)(3) organizations are eligible to receive tax-deductible donations because they are organized and operated for an exempt purpose such as charitable, religious, or educational.

Benefits of 501(c)(3) status:

• (Mostly) free from federal income taxation

• Donors may deduct contributions from taxable income

• Eligible for foundation grants

Limitations of 501(c)(3) status

• Must be organized and operated exclusively for exempt purposes

• Must irrevocably dedicate assets to exempt purposes

• Cannot confer excessive financial benefits on ‘insiders’ or other ‘disqualified persons’

• Cannot provide substantial private benefits to ANY individual

• Cannot support or oppose candidates for political office and may not devote a substantial part of its activities to lobbying

How to obtain 501(c)(3) status

• File IRS Form 1023 Tax-Exemption Application Form ($600 application fee)

• Form 1023 must be filed within 27 months of incorporation in order to obtain tax-exempt status retroactive to date of incorporation. Corporations filing after 27 months will be tax-exempt as of the application date. This means that they may have to pay income tax and all donations received prior to the application will not be tax-deductible.

Qualifying Purposes

• Relief of the Poor

• Lessening the Burdens of Government

• Lessening Neighborhood Tensions

• Elimination of Prejudice and Discrimination

• Defense of Human and Civil Rights

• Combating Community Deterioration and Juvenile Delinquency 

Examples

• Homeless Shelter

• Affordable Housing Developer

• Community Health Care Clinic

• Job Training Program for Low-Income Individuals

• Child Care Center

• Domestic Violence Shelter

• Youth Services Organization

IRS Form 1023

Provide Complete Description of Activities

• Show that organization’s activities will serve the exempt purpose

• Show that organization will actually conduct activities

Caution: IRS has denied exemption if the description is too vague to prove that activities are exempt.

IRS will scrutinize relationships with:

• Founders

• Board Members

• Officers

• Major Donors

• Highly-Compensated Employees or Consultants

• Other Private/For-Profit Persons

IRS Form 1023-EZ

Streamlined Exemption Process for Small Nonprofits

• 501(c)(3) self–certification process using a 3-page online form

• $275 filing fee

• Quicker processing time

• Generally available to organizations that have had no more than $50,000 of annual gross receipts in any of the past 3 years, or have projected $50,000 annual gross receipts in the current and each of the next 2 years

• However—24 additional exceptions (e.g., schools, colleges, churches, hospitals or medical research organizations, organizations with total assets in excess of $250,000)

Public Charity or Private Foundation Status

• IRS divides all 501(c)(3) charities into two types:

  • Public Charity: supported by the broad public, or from fees for charitable services

  • Private Foundation: supported by one or a few private individuals or private foundations

• Private foundations are subject to limitations and excise taxes and are not eligible for some foundation grants—operating charities try to avoid this!

• IRS will grant permanent ruling as a public charity if qualifying budget is submitted on Form 1023 (Beginning in 6th year, must satisfy public support test)

Program Development

For each program activity, figure out the following:

• Why does it further exempt purpose?

• Who conducts it?

• When is it conducted?

• Where is it conducted?

• How is it funded?

• % of total time/$ spent on it

Development a Program Budget (pdf)