If you’re starting a nonprofit organization and you’ve already taken the important steps like finding your board members and writing your mission statement, you might be ready to file for official tax-exempt status with the IRS. It can be tricky to navigate the forms required for your application, so in this article, we’re going to…
If you’re starting a nonprofit organization and you’ve already taken the important steps like finding your board members and writing your mission statement, you might be ready to file for official tax-exempt status with the IRS. It can be tricky to navigate the forms required for your application, so in this article, we’re going to break down the two possible forms you can use to apply for exemption under Section 501(c)(3): form 1023 & form 1023-EZ.
We’ll look at the differences between the forms, the requirements (including fees!) for both forms, and the pros and cons of using 1023-EZ. We also break down some frequently asked questions so you can prepare your materials (with whichever form you choose!) with confidence.
Read on to decide which form is right for you and how to file correctly.
IRS Form 1023 is the form used by nonprofits to apply for tax-exempt status under Section 501(c)(3). This is an important step toward establishing a nonprofit in any state.
Once filed and approved, your organization will receive a determination letter from the IRS to prove that you qualify for tax-deductible contributions. Since Form 1023 is subject to federal public inspection, what you file on the form could be seen by the public at large.
In 2014, the IRS released Form 1023-EZ to make applying for tax-exempt status more attainable for smaller organizations.
Read on to see if your organization qualifies to apply with Form 1023 or Form 1023-EZ.
Your first step is to be sure your organization qualifies for tax exemption under IRS Section 501(c)(3). To do so, your organization must be operated exclusively for charitable, educational, or religious purposes. There are specific qualifications about how the organization’s earnings may be used. 501(c)(3) organizations also may not try to influence legislation or participate in any campaigning for political candidates.
There is also Form 1024, which serves an organization filing for tax-exempt status under any other 501(c) section like 501(c)(19) (veteran’s organizations) or 501(c)(5) (labor or agricultural organizations).
Not every organization that wants to be exempt under 501(c)(3) has to file Form 1023 or even Form 1023-EZ. An organization that complies with section 501(c)(3) and has one of the following qualities does not have to apply at all to receive tax-exempt status:
Some organizations that fall into these categories go ahead and apply for official tax-exempt status anyway in order to reassure their donors that their contributions are indeed tax-exempt.
Once you’ve established that your organization is eligible for 501(c)(3) exemption status, it can be difficult to tell which form is right for your organization. The main difference? Form 1023 is long. Form 1023-EZ is much shorter with fewer requirements.
Typically, organizations have to have total assets under $250,000 and gross revenue below $50,000 to qualify for form 1023-EZ. Private operating foundations cannot file form 1023-EZ. The fee to file form 1023-EZ is only $275 and at around 90 days, the review process is shorter than the form 1023 review process.
Form 1023, then, is used for organizations who don’t fall into those revenue limits, private operating foundations, and organizations for whom the cons of the shorter form outweigh the pros (more on that in a later section!). It costs $600 to file and the review process can take up to 180 days. The form also requires additional documentation like your operating documents.
Although both forms accomplish the same end goal, there are some attractive qualities to either form. Read on to learn more about the specific requirements to decide which form is reasonable for your organization.
In order to file as a 501(c)3 organization, you need to apply with the IRS by filling out one of these forms:
This 12-page form also includes 8 additional schedules that you may or may not have to fill out, depending on your organization’s circumstances. The schedules are for:
1. Answers to each question. The many questions on the form require some detailed answers. Here are some things to expect discussing:
2. Attachments. Along with your correct and detailed answers, you’ll have to submit the following attachments:
Although all of this seems daunting, as long as you follow the instructions and carefully ensure each requirement is fulfilled, your form will be reviewed in a timely manner.
You should file Form 1023 within 27 months after the end of the month in which your organization was legally formed. If not, you will have to file Schedule E.
In case you file within 27 months and your application is approved, the effective date of your tax-exempt status will be the legal date of your organization’s formation. If you file after that period, the effective date is the date you filed Form 1023.
You will file Form 1023 online at Pay.gov. To submit the form, you need to do the following:
This online form requires much less information from the organization filing it. In lieu of long, narrative answers, the response fields are significantly shorter and less detail is needed.
1. Eligibility worksheet. Before looking at the form instructions, you must complete the eligibility worksheet to see if your organization qualifies to use Form 1023-EZ. Also, there are thirty questions on the worksheet; if you answer yes to even one of them, you are not eligible to use that form.
But worry not! If you are ineligible to use Form 1023-EZ, you can still use Form 1023 to apply for exempt status.
2. Answers to each question. Once you’ve ensured that you are eligible to use this shortened form, you need to review the questions. The kind of information required from your organization is similar to the list above, only you don’t have to provide as much detail for each section. Many of the questions require you to check the appropriate box rather than enter your own information.
In Part III Line 4, you’ll be required to check a box attesting that your organization will do the following:
It’s important to spend time reviewing the instructions beforehand to be sure you have complete answers to every question.
Form 1023-EZ doesn’t require any attachments. However, there is an attestation that your organizing documents follow a series of requirements. Have your documents handy for that.
Just like Form 1023, you’ll want to try to file Form 1023-EZ within 27 months after the end of the month in which your organization was legally formed. There are no penalties for filing after that period, but your tax exemption date will be the date that you filed and not the date when your organization was legally formed.
Form 1023-EZ is only accepted online. To submit the form, you need to do the following:
Form 1023. The review takes about 180 days or 6 months.
Form 1023-EZ. The review takes about 90 days or 3 months.
Of course with both forms, you might end up hearing back sooner. This process will also be smoother if you ensure you have all the questions answered and necessary documents attached, depending on which form you use.
For Form 1023, there is an option to expedite review so you get your response even sooner. The IRS will only consider expediting with a written request and for only one of the following reasons:
However, if you don’t fall into one of those categories, you’ll have to wait on standard review times.
Form 1023 Fee: $600
Form 1023-EZ Fee: $275
Whichever form you use, applying for tax-exempt status is going to cost your organization some money. The payoff—getting your official status—is well-worth the hit to your budget in the end.
If your nonprofit organization qualifies for it, you might be thinking—why not use the shorter, easier form that gets reviewed sooner? Some organizations still choose to go with form 1023 over form 1023-EZ. Here’s why:
Tax lawyers and other nonprofit professionals criticize the form for a variety of shortcomings, like:
In this section, we answer the common questions on form 1023 and form 1023-EZ.
Yes, you must have an EIN to apply for tax-exempt status. You can easily apply for an EIN online.
You can apply for exemption using either of these forms (if you’re eligible for 1023-EZ) if your organization is a corporation, a limited liability company (LLC), an unincorporated association, or a trust. A partnership does not meet the requirements for exemption.
According to the IRS website, yes. You should go into a good amount of detail, especially for the activities response, which should address the following:
Be sure to address each of these elements in your detailed narrative response.
You can find both forms online at Pay.gov. Remember that you’ll need to make an account before you access either form. Instructions for both forms are available on the IRS website.
Yes, form 1023-EZ can be used to apply for reinstatement. You can also use form 1023. For more information about how to have your tax-exempt status reinstated, visit this page of the IRS website.
The short answer is that you may be required to file additional documents with the IRS. When your income increases, the IRS will be notified through your annual nonprofit filing. Your organization will then be on their radar and you might need to provide additional information about how you run your nonprofit. But don’t worry! You won’t need to refile with form 1023.
That said, if you expect your income to significantly increase in the future, you would be wise to go ahead and just file form 1023. Save yourself and your organization the potential headache!
Whichever form you choose to use for your organization, remember to take your time to gather all the necessary information so your filing process can be as smooth as possible. The sooner you get your official tax-exempt status, the sooner you can start fundraising for tax-deductible donations—the sooner you can get to your mission.
For more nonprofit management tips, visit the rest of our nonprofit blog.
Lindsey Baker Bower is a writer, educator, and nonprofit professional. She has years of experience helping arts nonprofits with their fundraising messaging and strategy. You can connect with her on LinkedIn.
Lindsey Baker Bower