In order for an organization to be treated as tax exempt for federal income tax purposes and, depending on the nature of the organization, be eligible to receive tax-deductible contributions, it must receive a determination about its status from the IRS. To do this, Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and other information must be filed. In addition to the form, which is essentially an application to request IRS approval of tax-exempt status, you also have to pay a user fee (explained later). Unlike your personal tax return which is private, Form 1023 is subject to public disclosure. 

Eligibility for Form 1023

To be viewed as a so-called 501(c)(3) organization, a group must be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or education purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. Such an organization is set up under state law and its organizing agreement must limit the purpose of the organization and permanently dedicate its assets to its exempt purpose.

Further, it must operate to further its exempt purpose. It cannot engage in certain prohibited activities, such as participating in political campaigns, using assets to unjustly enrich board members, officers and key employees, engaging in activities that are illegal or violate public policy, or restrict legislative activities. (For more, see 5 Steps To Forming A Tax-Exempt Nonprofit Corporation.)

Note: Technically Form 1023 is not required for religious houses of worship (churches, synagogues, temples and mosques) and certain auxiliaries. However, filing the form and receiving a determination guarantees that contributions to them are tax deductible.

Completing the Form

The form is 12 pages, plus various schedules and a checklist. Before you begin to complete the form, run through the checklist to make sure you have all the necessary documents and information. For example, the organization must have an employer identification number (EIN). You can’t submit the form without one. You can obtain the EIN online.

You also need copies of the organizing documents, such as:

  • Articles of incorporation, plus amendments if any, showing the filing with the appropriate state agency

  • Trust agreement, plus amendments if any, signed and dated

  • Articles of association, constitution, bylaws or other organizing documents, plus amendments, dated; two signatures are required.

There must be a purpose clause explaining the tax-exempt purpose of the organization. There must also be a dissolution clause specifying how assets will be distributed if the organization is dissolved. The assets must go for a tax-exempt purpose.

You must specify an “authorized representative” to deal with the IRS in this matter. It can be someone from the organization or you can name a person who is eligible to practice before the IRS. To do this, complete Form 2348, Power of Attorney and Declaration of Representative.

The form consists of various parts:

  • Part I: Identification of the applicant, including name, address, EIN, contact information, website, date the organization was formed and whether it was formed under the laws of a foreign country.

  • Part II: Organizational structure (i.e., whether a corporation, limited liability company, etc.).

  • Part III: Your organizing document(s), as explained earlier.

  • Part IV: A description of your organization’s past, present and planned activities. This is the heart of the form where you describe why you’re entitled to tax-exempt status.

  • Part V: Compensation and other financial arrangements with the organization’s officers, directors, trustees, employees and independent contractors.

  • Part VI: Members and other individuals and organizations receiving benefits (goods, services, funds) from your organization.

  • Part VII: The organization’s history, meaning whether it is a successor to another organization. If the organization is a successor, also complete Schedule G (explained below).

  • Part VIII: Specific activities; you must indicate by checking a box that you don’t engage in prohibited activities such as supporting political candidates or attempting to influence legislation. You also must tell the IRS about your fundraising activities.

  • Part IX: Financial data (revenue, expenses and a balance sheet) from the organization for the most recent four tax years. If the organization has been in business for more than one year but less than four years, make a good faith estimate of future finances for a total of three years. If in existence for less than one year, provide projections.

  • Part X: Specify whether the organization is a public charity or a private foundation.

  • Part XI: User fee information must be provided by checking the box for the appropriate amount of the fee, as described earlier.

There are also schedules, some of which may need to be completed, depending on the nature of the organization.  Schedules include:

  • Schedule A: Churches

  • Schedule B: Schools, colleges and universities

  • Schedule C: Hospitals and medical research organizations

  • Schedule D: Section 509(a)(3) supporting organizations. These are charities that carry out their exempt purposes by supporting other exempt organizations.

  • Schedule E: Organizations not filing Form 1023 within 27 months of formation

  • Schedule F: Homes for the elderly or handicapped and low-income housing

  • Schedule G: Successors to other organizations

  • Schedule H: Organizations providing scholarships, fellowships, educational loans or other educational grants to individuals and private foundations requesting advance approval of individual grant procedures

The form must be signed by an officer, director, trustee or other authorized official.

Note: There is an interactive version of the form that you can complete online. This includes the preliminary questions you need to answer to determine your eligibility to be tax exempt

User Fees

Obtaining IRS approval for tax-exempt status isn’t free. The cost for obtaining approval is:

  • $400 for organizations with gross receipts no over $10,000 annually during a four-year period

  • $850 for organizations with gross receipts over $10,000 annually during a four-year period.

The IRS may change the user fees from time to time.

For Small Organizations

Instead of completing Form 1023 to receive recognition for exempt status, you may be able to file a simplified form – Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Essentially this option is for small organizations (projected annual gross receipts not exceeding $50,000 for three years and total assets of no more than $250,000). This three-page form first requires you to complete the Form 1023-EZ Eligibility Worksheet to make sure you can use this simplified option; you must attest that this has been done by checking a box on page 1 of Form 1023-EZ.

The Bottom Line

You can learn more about the form from IRS questions and answers. While anyone running an organization is permitted to complete the form, this is not a do-it-yourself tax application. It is highly advisable that the organization work with a tax professional who is knowledgeable in tax-exempt matters.

You may also be interested in reading 5 Good Reasons To Build A Career In Nonprofits.

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