For many nonprofit organizations, one of the most important first steps they can take is to apply for their 501(c)(3) status. But this process can be quite confusing for a first-time nonprofit organizer, and is not made any easier by the fact that the process can take 6-12 months to complete. However, while applying for your nonprofit’s 501(c)(3) status can be challenging, it can be a vitally important part of making sure your nonprofit is able to survive and thrive.
The process of applying for your 501(c)(3) status starts in most cases at the state level, where you apply to register your organization as a nonprofit corporation. This part of the process, in most cases, is fairly simple and quick. Once this is done, the nonprofit can then apply for a Tax ID (called an EIN), open their bank accounts, and start operating. However, it is important that soon after starting operations, the nonprofit starts on its 501(c)(3) application with the IRS. This application will ask the nonprofit for all sorts of information–from information about the employees of the nonprofit, the compensation levels for employees, a projected budget for the nonprofit, its charitable goals, and information about its board of directors and legal standing. The application is quite long, and can be very confusing, so it is important to have an attorney guide you through this process.
Once you have finalized your application and provided all of the materials requested by the IRS, you will officially file the application. To do so, you will have to submit a filing fee along with your application of either $400 or $850, depending on how large your organization is and how much you receive annually in gross revenue.
Once submitted, it may take the IRS 6-12 months to review your application and render a decision. During this time, they may request more information from the organization and perform their own investigation.
If the IRS renders a favorable decision and issues the organization a letter certifiying their 501(c)(3) status, the organization is almost done. This status will allow the organization to be exempt from federal income taxes (though typically the organization will need to file an informational 990 Form each year) and will allow all gifts to the organization to be tax-deductible by the donor. However, the final step in the process will be to apply with your state for an exemption from state and local taxes. You will use your 501(c)(3) letter from the IRS to do this, and by doing so you should be able to exempt your organization from state franchise taxes and other applicable state and local taxes.
While this process can be difficult for a nonprofit, it is vitally important to the health and sustainability of the organization. By hiring an experienced nonprofit attorney to help, you can reduce the headache quite a bit and make sure that this important procedure is performed correctly.
If you have any questions about setting up a nonprofit corporation or applying for 501(c)(3) status, give our Attorneys at Cook & Gore a call at 214-236-2712.