Benefits of 501C3 Status
There are several benefits to obtaining 501c3 status that include tax deductions for your donors' charitable contributions, reductions in employment taxes and state sales tax, reduced postage rates, discounts on many products and services, and even tax-exempt credit financing.
In order to obtain this status for your organization, you need to follow a simple but sometimes lengthy process. Read on to understand and discover what is needed.
Step 1: Register your nonprofit with the state
In order for your company to be granted 501c3 status, you must first become a registered organization in your state. Each state has different filing requirements which can be found on your state’s secretary of state website. For an example of this, see the article on starting a nonprofit in California.
Step 2: Apply for tax-exempt status with the IRS
Next, you will want to file the proper paperwork with the Internal Revenue Service and includes submitting a Form 1023. This form serves as an opportunity to communicate your previous or proposed activity. During this process, the IRS will be evaluating appropriateness and ensuring the absence of any conflicts of interest between the owners and the mission of the organization.
There are two ways to fill out form 1023 - the traditional form 1023 or form 1023-EZ. Check out the IRS website to determine the best filing method for you. If unsure, discuss options with your CPA and decide what makes the most sense for your organization.
TaxExemptWorld Tip: You will need an Employer Identification Number (EIN) for your organization and can quickly apply for one on the IRS website. You will need this when submitting various filings and also necessary for purposes in the future like opening a bank account, applying for credit, and filing form 990s.
Step 3: Apply for tax-exempt status with the state
For many states, achieving 501c3 status from the IRS grants you tax-exempt status for your state as well. Some states such as California are different however and require their own separate application process.
In addition, most states require proper registration with their Secretary of State in order to solicit donations. This status is essential to have prior to fundraising efforts.
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