Zach Young, the Vice President of the Northwest Arkansas .NET User Group, just informed me that we have achieved 501(c)(3) status for Northwest Arkansas .NET User Group, Inc. This is an awesome achievement for the group since we are not exempt from taxes and can be viewed as a charitable organization by donors.
John Oswalt, Treasurer, has some extended information about what this status means on his blog post here.
Here is some additional info you might need if your user group is thinking about starting the process of becoming a 501(c)(3) organization.
What does being a 501(c)(3), tax-exempt organization mean? The term "tax-exempt," when used in reference to nonprofit organizations, generally refers to the net profits (proceeds over and above expenses) of an organization being exempt from federal and/or state income tax. While a nonprofit organization can be established by incorporating, the entity is not automatically tax-exempt upon creation with the state. Tax-exemption can usually be achieved only through applying for and receiving Internal Revenue Service (IRS) approval.
Is there more than one category of tax-exempt organization?
Yes. The one most familiar (and addressed in subsequent questions below) is the Internal Revenue Code (IRC) Section 501(c)(3) public charity or private foundation, which is established for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children. There are also IRC Section 501(c)(4) through 501(c)(27) organizations that are considered tax-exempt, but not charitable. Examples include trade associations, social clubs and certain advocacy organizations involved in substantial political lobbying activity.
What benefits does being a 501(c)(3) offer a nonprofit and its contributors? One of the primary benefits of being considered tax-exempt under IRC Section 501(c)(3) is the ability to accept contributions and donations that are tax-deductible to the donor. Additional benefits include, but are not limited to:
- Exemption from federal and/or state corporate income taxes
- Possible exemption from state sales and property taxes (varies by state)
- Ability to apply for grants and other public or private allocations available only to IRS-recognized, 501(c)(3) organizations
- Potentially higher thresholds before incurring federal and/or state unemployment tax liabilities
- The public legitimacy of IRS recognition
- Discounts on US Postal bulk-mail rates and other services
What form is required for 501(c)(3) status?
To apply for IRS 501(c)(3) recognition, IRS Form 1023 must be completed and filed.
What are the fees to file Form 1023? The IRS has a two-tiered filing fee structure. Most organizations pay the standard $750 filing fee when sending their application to the IRS. Organizations that expect to have (or have had) no more than $40,000 in gross revenue for the first four years combined can pay a reduced filing fee of $300.
Is there a state application as well as federal? In most states, no. While a handful of states have a simple, one- or two-page form that must be prepared, California is the only state that requires a separate application process rivaling the one required by the IRS. In California, federal tax-exemption does not eliminate state income tax liability until approval is received from the California Franchise Tax Board. We can assist with the California filing.
How long does it take for the IRS to approve 501c3 status? Typically, IRS 501(c)(3) approval takes between 2 and 12 months, inclusive of likely written follow-up questions. Sometimes it takes a little less; sometimes a little more. Expedited review can be requested if a new organization is being formed to provide immediate disaster relief or if a promised grant is both 1) substantial relative to the organization’s budget and 2) the grant has a specifically-defined expiration date. There is no guarantee the IRS will grant expedited review requests.
What happens if the application is rejected? A negative 501(c)(3) determination by the IRS can be appealed. Alternatively, the organization may choose to apply again from scratch. In either case, it is usually an uphill battle to acquire 501(c)(3) recognition once an organization’s initial application has been rejected.
Can anyone complete Form 1023? Technically, anyone can complete Form 1023. From a practical standpoint, it is usually advisable to enlist the help of a professional who specializes in the process, such as The Foundation Group. While the IRS rejects slightly less than 10% of applications filed, more than one-third are abandoned by the filer...usually out of frustration or inability to answer the IRS follow-up questions. Out of approximately 80,000 applications filed annually, nearly half never make it through the process.
Summary There are several resources online that provide additional information. I highly recommend that you work with an accountant locally, build a relationship with them. It is important to have someone that really understands the financial and legal aspects of your organization. A lot of the information here and more can be found on the Foundation Group’s 501(c)(3) site, the benefits are listed here.
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