Applying for Exempt Status

Entities that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes may be eligible for federal income tax exemption. What does exempt from federal income tax mean? The organization does not pay federal income tax on the net earnings of the operation. An organization that has applied and received their exemption under Code 501(c)(3) may be receive charitable contributions that are tax deductible by the donor.

So how does an organization receive exempt status?

There are two requirements for exemption - organized and operated exclusively for one or more exempt purposes (see the list above). Churches including synagogues, temples, mosques, integrates auxiliaries of churches, conventions/associations of churches and organizations that have less than $5,000 in gross receipts do not have to file the application with the IRS. This application is referred to as Form 1023 and it is due within 27 months after the end of the month in which the organization was legally formed.

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, requests alot of information about the operations (planned income; fundraising, grantmaking, political, lobbying and foreign activities) and organizational structure (board composition/related businesses; compensation and conflict of interest policies). You will be required to file a copy of the organization’s certificate of formation, bylaws and conflict of interest policy, if applicable, with the form.

Based on the planned operations, the organization will either be classified as a public charity or a private foundation. As a public charity, the organization has a broad support base and is predominately supported by public contributions. As a private foundation, the operations are supported predominately from the investment earnings and a small number of donors. There are different reporting requirements depending upon the classification. The IRS will determine the classification.

Depending on the complexity of your organization’s application, the IRS may have additional questions and require clarification. So be prepared to respond and be patient. For more information on Form 1023, see the IRS website or Form 1023 instructions.