A Long Way to Nonprofits Status

Setting up a nonprofit entity under state law is only the first step on the long road to obtaining a 501(c)(3) status and tax exemption from the IRS. The entire process can take several months. After the new entity is formed under state law, the organization must submit an application for tax-exempt status on IRS Form 1023. Organizations with projected gross receipts of less than $50,000 per year for the first three years and total assets under $250,000 may be eligible to file the shorter version of the application (Form 1023-EZ). A shorter form means a faster processing time of four to six weeks. The majority of nonprofits, however, need to file a standard form, the processing of which takes anywhere from eight to ten months. The good news is that while an application is pending, the organization can treat itself as exempt from federal income tax under section 501(c)(3) (and must file Form 990 while its application is pending). Any donations received before the IRS approves the application will generally be retroactively treated as tax-deductible contributions. If the organization solicits donations during that time, it should clearly communicate to the donors that its application is pending, and its tax exemption has yet to be granted. If the organization ultimately does not qualify for the exemption, the donors’ contributions will not be tax deductible.