501c3 Document: Everything You Need to Know
501c3 document can refer to a few different documents but is often refers to a 501c3 organization’s Determination Letter from the IRS.5 min read
501c3 document can refer to a few different documents but often refers to a 501c3 organization’s Determination Letter from the IRS. This is the 501c3 document that is usually used to prove the organization’s tax-exempt status to donors and when otherwise required.
Introductory clause – Indicate that the persons signing are certifying the Articles and specify what state the nonprofit corporation is being formed in.
Article I – State the nonprofit corporation’s name.
Article II – The address of the nonprofit corporation’s principal office within the state of incorporation. A California nonprofit should have a California address, a Washington nonprofit, should have a Washington address, and so on.
Article III – State the charitable purpose of the corporation. You can find suggested language in the IRS approved examples. The purpose may be broad and generally state that the corporation’s purpose is charitable, religious, educational, or scientific. Or it can be narrowed, explaining the exact nonprofit goals of the organization – like providing education to indigent students or raising money for scientific research into brain tumor cures.
Article IV – List the names and addresses of all the nonprofits trustees. These can change later in the nonprofits life cycle.
Article V – Required details of the nonprofits operations that show that it is a nonprofit are written here. This section will disallow political activity, will prohibit distributions to the benefit of private individuals with certain exceptions allowing reasonable pay for services rendered to the organization. This section will also prohibit the organization from doing anything inconsistent with the IRS code provisions that govern 501c3s. The IRS examples again provide useful suggested language that covers these points succinctly.
Article VI – This article states what happens to assets when the nonprofit is dissolved. It should require that when this happens all assets be distributed to 501c3 organizations or to state, local, or federal governments for a public purpose. This article should also provide that if the nonprofit does not dispose of its assets in this manner, a court will dispose of them in the same manner.
Signatures – The Articles should conclude with a space for the signatures of authorized persons and the date they Articles were signed.
If you have already formed your nonprofit, you will need to file amended Articles of Organization with your state that conform to the requirements above. The IRS will not approve tax exempt status for a nonprofit whose Articles do not meet all the necessary requirements.
Some organizations also include additional information in their Articles that is either required by state law or just included in the organization’s discretion.
Forming the nonprofit corporation has the added benefits of legitimacy for the organization and protecting the organization’s board members and managing officers from personal liability for the charitable organization’s activities.
Complete Other Organizational Requirements
The formation process also involves drafting the required legal documents like Bylaws and Board of Directors Rules and obtaining a Federal Employer Identification Number (“FEIN”), a tax ID number for the corporation, from the IRS. The nonprofit might also open bank accounts in its name during this formation stage.
Apply for 501c3 Status
The formation stage for the nonprofit can usually be completed relatively quickly and easily. Applying for 501c3 status is trickier, and it is often prudent to hire someone with experience to help.
The form used for applying for 501c3 status is IRS Form 1023, called the “Application for Recognition of Exemption.” It is not free to apply, the application costs hundreds of dollars to file.
When the IRS receives an application, it assigns it to an examiner who oversees evaluating it and issuing a decision. The evaluation process for 501c3 applications is not a rubber stamp process. The IRS really evaluates the applications, and its decisions are unavoidably subjective. The examiner first ensures that all forms are properly completed. If they are not, there is no reason to engage in substantive review and the application will probably be rejected.
When reviewing the substance of the application, the IRS examiner considers many factors. One consideration will be whether all of the IRS’ requirements are met including proper Articles of Incorporation. The examiner will also decide if the nonprofit’s purpose fits within the 501c3 allowable purposes. If it is the examiner will evaluate whether the nonprofit’s intended actions and programs further its stated charitable purpose. The IRS will also evaluate whether there are potential conflicts of interest where an individual may be looking to wrongfully benefit personally from the 501c3’s earnings. After evaluating these and other considerations, the examiner decides whether tax exempt status can and will be granted.
Once the examiner decides, he or she sends the applicant nonprofit a letter informing them of the decision, in what is called an IRS Determination Letter. If the decision is favorable, the letter is a reason for the nonprofit to celebrate! The letter will be sent to the organization at the contact address provided. It will include the date that tax exempt status was approved for the nonprofits reference. It will also tell the nonprofit about some the obligations that come with being a 501c3 including required IRS reporting.
Comply with State Requirements
Once 501c3 status is obtained from the IRS, the process is not over. The nonprofit must look to the state that it is incorporated in and figure out what obligations or requirements it must comply with at the state level.
Over 40 states require a Charitable Solicitations Registration be filed with the state Attorney General’s office if the nonprofit will be soliciting donations of any kind, which most do.
501c3 organizations that want to take advantage of any state level tax exemptions may have to file additional applications with the state. Many states automatically grant exemptions from state taxes on corporations to 501c3s, but some, like California, require nonprofits to undergo a separate application process. Some states offer additional tax exemptions, like sales tax exemptions to charitable organizations that apply for them. These additional exemptions usually require 501c3 status as a pre-requisite.
Other Proof of 501c3 Status
Proof of exempt status is a recurring issue for nonprofits. As discussed above, the Determination Letter is usually the key 501c3 document for proving exempt status. In addition to the Determination Letter, there are a few other ways you can obtain proof of your organization’s 501c3 status.
For official confirmation of the status, check Publication 78 on the IRS website. That document includes most tax-exempt organizations. If you don’t need official confirmation, you can use Guidestar’s website where you can find tax information about most charitable tax-exempt companies in the United States.
If Guidestar does not show your tax filings and you do not remember filing them, you may have lost your tax-exempt status. If your exempt organization does not file a tax return for three years in a row, it will usually lose its exempt status.
If you are concerned that your organization may have lost its exempt status or need other legal guidance for your organization, post your legal need on Upcounsel’s attorney connection platform. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.