A non-profit organization is subject to provisions of several sections of the IRS code (title 26). Some common IRS sections relevant to non-profit organizations are: IRS Section Title Section 501 Exemption from tax on corporations, certain trusts, etc Section 503 Requirements for Exemption Section 507-509 Rules related to private foundations Section 511 Tax on unrelated Read rest of it.
Start 501C3 organization
Want to start a 501(c)(3) organization?
Start with these: FAQs
What are the tax benefits of starting a 501 C 3 organization ?
A 501(c)(3) is entitled to two kinds of tax benefits.
1) Tax exemption: Income earned by the 501-c-3 organization is exempt in the hands of the nonprofit organization
2) Tax deduction: Donors to a 501-c-3 can claim exemption to the extent of their donation.
As an added advantage, most states also allow state tax exemption on income, sales and property taxes to 501 C-3 organizations.
What are the prerequisites to start a 501-c-3 organization ?
1) Organization Must have a well defined purpose written in IRS format
2) Organization must have a valid E.I.N
3) Must be a *Public benefit organizations
What are Public benefit organizations ?
Public benefit organizations is defined under Section 170 of the Internal Revenue Code as a charitable organization which receives more than 1/3rd of its support from gifts, grants, membership fees, or certain investment income. To be qualified as a public benefit organization, it must fulfill requirements of public support test.
Public Benefit organizations are further classified by IRS as religious, educational, charitable, scientific, literary, public safety, and amateur sporting organizations, organizations for the prevention of cruelty to children and animals and other organizations.
In contrast, there are Private foundations which are charitable organizations that depend on a small number of donors and are generally controlled by those donors. These organizations normally receive donations from one or two major source of funding like a sponsor family or a corporation. Private foundations can be started as a 501 C -3 organization only if they qualify under Section 170 of the Internal Revenue Code.
What are the documents required to start a 501-c-3 organization ?
You need to apply for tax exemption under section 501 C 3 with the IRS on form 1023.The form must be accompanied by the following documents:
1. Bylaws: Copy of update bylaws of your organization.( See: Sample Bylaws)
2. Description of purpose: A document specifying the purpose and scope of activities of the organization. This should also explain the processes and procedures adopted by your organization for carrying out the stated purposes.
3. Financial statements: Financial statements like receipts and expenditures, balance sheet and cash flow statement for the current year and the three previous years (or the number of years of existence, if less than 4 years). If the organization is less than a year old, it must instead furnish a estimated or proposed budget for next two years along with a current statement of assets and liabilities.
4. Miscellaneous: In addition,IRS may seek clarifications and /or additional documents like copies of publications, brochures, advertisements,contract copies,lease agreements and other documents it deems expedient for granting tax exemption.
5.Optional documents: Organizing document: A copy of your organizations articles of incorporation, articles of association, trust indenture, or other organizing documents, if available.
Conformed copies of these documents must be submitted. Do not submit original documents. All submitted documents must be stamped with the organization’s name, address and E.I.N. If an organization does not submit these documents it cannot qualify for tax-exemption.
Is there a fee for obtaining a 501 C 3 exemption recognition ?
The application for grant of 501 c 3 tax exempt status must be accompanied by the filing fee. The amount of fee payable depends on the budget of the organization and may vary anywhere in the range of $300 to $1000.Contact IRS for the currently applicable fee structure. The fees is to be paid using IRS Form 8718.
What is the process for 501 c 3 approval ?
Upon submitting duly filled application form, it is reviewed by the ‘Exempt Organizations Determinations’ department of IRS. Each application is alloted to an IRS manager who appraises the merits of the application. The manager may either issue a favorable determination or issue an adverse determination which results in exemption denial. In unusual cases, the manager may also refer the case to the headquarters of the IRS for a ruling.
How much time does it take to get 501 C 3 approval ?
It normally takes round 2-3 months time for IRS to assess and grant a tax exemption status.This is the shortest time IRS takes to assess an application.
Incorrect filing, incomplete application, missing attachments and non-reply to raised queries within stipulated time may further delay the process.
What document does IRS provide to a 501 c 3 organization ?
IRS issues a Letter of Determination (also called ‘ the letter of ruling’) to an approved organization as a formal evidence and notification of grant of tax exempt status. Often donors to your organization may ask you to furnish a copy of the Letter of Determination before making donations.
The determination letter is normally effective from back date which is the date of the formation of starting of the organization. Sometimes IRS issues a ‘conditional determination letter’ which requires the organization to amend, alter or fulfill certain terms before it qualifies for 501 C 3 tax exemption.
Is their a time limit for applying for IRS determination ?
Application for 501 C 3 tax exempt status must be filed with the IRS within 15 months of starting a nonprofit organization.
This may be extended up to 12 additional months (total of 15+12 =27 months), if sufficient explanations for the delay is furnished.
Can I obtain 501 C 3 application for a newly formed organization ?
If an organization has been newly formed and has not yet started operating on a full scale, you will need to ensure the following for a favorable determination:
1) Describe organization’s proposed operations in enough detail to give IRS reasons to establish that the organization meets the requirements of 501 C 3. Include a detailed explanation of the proposed activities, procedures and standards planned for the organization.
2) Give a clear account of organization’s expected sources of funds
3) Give a detailed description of expected expenses.
In the absence of a vivid description, IRS may issue an adverse ruling.
What is your recourse in case of rejection of 501 C 3 application?
If IRS turns down tax-exemption application,you can appeal against the decision at Appeals Office for a reconsideration. The appeal must be filed within 30 days from the date of the adverse ruling.If the application is rejected wrongfully by the appeals office, you can file suit in the the U.S. Tax Court or in U.S. District Court for the District of Columbia or in the U.S. District Court of Federal Claims for a declaratory judgment.
Other Articles from the section:
There are 3 eligibility criteria fixed by IRS for granting of 501(c)(3) exemption. I) Organized – The organization must either be a corporation, trust, or unincorporated association which must be evidenced by its organizing document which could be its articles of incorporation, trust documents or articles of association. II) Exempt Purpose – For tax exemption, the Read rest of it.
To be eligible for tax-exempt recognition under section 501(c)(3) of the Internal Revenue Code, a nonprofit organization must be organized and operated exclusively for “exempt purposes” as prescribed by IRS. Exempt purposes as defined by IRS The purposes declared as exempt purposes in section 501(c)(3) are charitable, educational, religious, scientific, literary, fostering national or international Read rest of it.
Introduction A nonprofit organization that has received tax exempt recognition under Section 501(c)(3) of the IRS code is exempt from taxes on Income from any activity which is substantially related to its tax exempt purpose. Income derived from the normal purpose for which the organization has been established is called as the “Exempt function income”. Read rest of it.
As per the Federal taxation system tax must be paid on income earned by individuals or corporations. There are however certain categories of Income that are exempt from tatxation under special statutes passed by the Congress. Non profit organizations are exempt from paying taxes, if they comply to certain norms and provisions laid down for Read rest of it.