Once your organization has incorporated as a nonprofit, you may want to consider applying for tax-exempt status. If you nonprofit is formed for charitable, religious or educational purposes, you may qualify for tax-exempt status under section 501(c)(3). There are also many other types of 501(c) classifications. A good resource for information about tax-exempt status is IRS Publication 557.
Q. What does tax-exempt status mean?
A. When an organization receives tax-exempt status under any of the 501(c) sections, it becomes eligible for a variety of tax-related benefits that include:
1. Exemption from state and federal corporate income tax
2. Postal rate reductions
3. The ability to solicit contributions which are tax-deductible as charitable contributions
4. The ability to apply for foundation grants
5. Possible exemption from local property taxes
6. Exemption from Federal Unemployment Tax
Q. Once you have submitted your application for a 501(c)(3), how long should it take before you are approved?
A. You should receive a determination within 4 months. However, there are factors that may cause the process to take longer. The IRS is slowed down by too many applications and too few staff or your application is incomplete.
The person reviewing your application has questions or wants more information or there is some factor that triggers a more thorough examination of your organization
Q. What if we get a letter from the IRS asking for more information?
A. It is quite common for this to occur. The important thing to know is that you must respond to such letters within the time frame provided. Your response does not have to be complete. If you do not respond, the agent is free to assume that you are no longer interested and may discard your application. In this case, you will have to re-apply and pay a new fee.
Q. What’s an advance ruling?
A. If yours is a relatively young organization the IRS will grant you provisional tax-exempt status for a period of time – usually 5 years – after which you are required to file additional financial information before receiving a definitive, or final, ruling. During the advance ruling period an organization has the opportunity to demonstrate it meets the criteria to qualify as a PSO or an FASO.
Q. Are we a PSO or an FASO?
Organizations that do not wish to be classified as private foundations and don’t fit one of the more specific categories provided by the IRS must meet the criteria of a PSO or a FASO.
PSO (Publicly Supported Organization):
A substantial part of the support received consists of contributions from the public, a publicly supported organization (such as United Way) or a governmental unit.
Substantial support can be generally interpreted as 1/3 of all revenue for the period in question.
FASO (Fee & Activity Supported Organization):
At least 1/3 of its support is from contributions, membership fees and gross receipts from activities related to its tax-exempt purpose
It does not normally receive more than 1/3 of its support from gross investment income.
Q. Where can we get help with this process?
A. Gladed you asked. This is my specialty. Just call 866-900-1040 and ask for Mary Bob.
The pages of this web site contain nonprofit information and a few articles about my hobby of biking. They have been collected from many independent sources. Each article or new item offers a different points of view and resources. This information is for for general information only. If you desire to ask a specific question, feel free to contact me
