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Having federal income tax exemption is commonly referred to as having 501(c)(three) nonprofit condition. The name comes from section 501(c)(3) of the Internal Revenue Code (IRC), which is the section allowing educational, charitable, religious, and certain other organizations to obtain federal tax exemption. To qualify equally exempt from federal income tax, you must beginning create and register an eligible organization. After creating your organization, you will be able to apply for tax exempt status with the Internal Revenue Service (IRS). Obtaining revenue enhancement exempt status offers a number of benefits for your nonprofit.

  1. one

    Know the benefits of revenue enhancement exemption. When your organization is recognized as taxation exempt under section 501(c)(3) of the IRC, you lot will not need to pay federal income tax and you will exist eligible to receive tax-deductible charitable contributions. Nonprofit organizations are dependent on donations in lodge to function and donors are much more willing to support organizations exempt under department 501(c)(3) because the donations are revenue enhancement deductible. In add-on, gaining 501(c)(3) status assures grant-making institutions that they are issuing grants to permitted beneficiaries.[1]

  2. two

    Choose an organizational structure. In order to be eligible for 501(c)(iii) condition, your organization must be structured every bit a corporation, trust, or unincorporated clan. The well-nigh mutual blazon of 501(c)(3) is the nonprofit corporation. Yet, yous should research your options before creating your system.

    • A nonprofit corporation is ane where no role of their income is distributable to members, directors, or officers.[2] This means that the corporation's profits must exist used for charitable purposes and not pocketed by executives.
    • A trust is a formal relationship where 1 person holds property subject to an obligation to employ or distribute that belongings for the benefit of someone else.[3] For example, a trust may exist created if you give Ted $400 to exist given to Jake in equal installments over v years.
    • An unincorporated nonprofit association consists of a minimum number of members joined together for a common, nonprofit purpose.[4]

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  3. 3

    Pick a name. Before you tin annals your business, you demand to choose an acceptable name. Your proper noun should be descriptive of your organization but you need to brand sure your name is not the same or similar to a proper name already in apply.[5]

  4. 4

    Engage initial directors. Some states require you to name a specified number of initial directors when y'all register with the state. The directors govern the nonprofit corporation and make loftier level decisions. Lath members must exist natural people (i.e., they cannot be other corporations) but they do not demand to live in the state you lot annals in.

    • In Texas, for example, you must name a minimum of three directors in your document of formation (i.e., manufactures of incorporation).[6]
    • In Oregon, you practise not need to proper noun any directors in your manufactures of incorporation.[7]

  5. 5

    Select a registered agent and accost. A registered agent is responsible for receiving any legal notices or official documentation. Your registered agent tin can usually exist an entity registered to do business in the land y'all are filing in or a natural person residing in the state. The registered office accost y'all choose must be a physical address (i.east., y'all cannot use a P.O. Box) located within the state you are registering in. The registered agent should be reachable at the accost you lot choose during normal business hours.[8]

  6. 6

    Limit your purpose. To be eligible for taxation exempt condition, yous must create a purpose statement for your arrangement. The purpose you choose must fall within ane of the categories described in section 501(c)(3) of the IRC. In addition, you lot cannot expressly permit activities that do not farther the purpose you choose.[9] In general, the post-obit exempt purposes are allowed:

    • Charitable, which includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of pedagogy or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of regime; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human being and civil rights; and combating community deterioration;
    • Religious;
    • Educational;
    • Scientific;
    • Literary;
    • Testing for public rubber;
    • Fostering national or international amateur sports competition; and
    • Preventing cruelty to children or animals.[10]

  7. 7

    Dedicate your assets to exempt purposes. When you fill out your manufactures of incorporation, yous will be required to permanently dedicate your avails to exempt purposes in order to be eligible for 501(c)(3) tax exemption.[eleven] This means that if your organization were ever to dissolve, your assets would exist distributed to other charities and not to your members or directors.

    • For example, your manufactures of incorporation could land: "Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of department 501(c)(3) of the Internal Revenue Code, or the corresponding department of any future federal tax code, or shall exist distributed to the federal regime, or to a land or local regime, for a public purpose."[12]

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  1. 1

    Fill up out your manufactures of incorporation. Your articles of incorporation are your cosmos documents and they volition be filed with a country agency, often the Secretary of Land'southward office. You should exist able to notice a form on your country's Secretary of State website. One time y'all locate the grade, you volition need to make full it out accurately and completely. In general, the manufactures of incorporation must contain the following:

    • Your organisation's name and type;
    • Your registered agent and registered part;
    • Your initial directors (in some states);
    • Your purpose; and
    • Your dissolution statement.[13] [14]

  2. 2

    File your articles of incorporation. When your articles of incorporation are complete, you will file them online. If your state does non offer an online filing service, you may take to file in person or through fax.

    • In Texas, yous can file your cosmos documents online using their SOSDirect system.[15]
    • In Oregon, yous can file your documents online through the Secretary of State's website.[16]

  3. 3

    Pay the filing fee. At the time you file your articles of incorporation, y'all will also exist required to pay a filing fee. These fees are often not waivable. In Texas the filing fee is $25.[17] In Oregon, the filing fee is $50.[18]

  4. 4

    Obtain required local licenses and permits. In addition to filing paperwork with the secretary of land, some organizations are required to obtain local licenses and permits in gild to conduct business.[19] This will most often be the case if you are opening up your concern to the public (due east.g., selling clothes or offering medical services).

  5. five

    Fulfill insurance requirements. Most nonprofit corporations volition need to take certain types of insurance in order to carry business. For example, if you are going to have employees, y'all volition most probable exist required to obtain unemployment insurance and workers compensation insurance.[20]

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  1. 1

    Apply for your Employer Identification Number (EIN). The IRS volition require you to obtain an EIN, which is considered your account number with the IRS. This EIN will be used whenever you correspond with the IRS. To utilise for an EIN, complete Grade SS-iv and submit it online through the IRS' website. Do non apply for an EIN until your arrangement is registered with the state.[21] Grade SS-4 should include the post-obit information:

    • Your business's information, including its name and address;
    • The type of entity you take, which in this example will normally be a corporation or other nonprofit organization;
    • The reason you lot are applying; and
    • The business concern's purpose and employee information.[22]

  2. 2

    Starting time the application in a timely mode. Well-nigh organizations will need to file for exemption past the terminate of the 27th month after you lot were legally formed. Your organisation will be considered legally formed on the date y'all filed your manufactures of incorporation.[23]

    • If you lot file late, y'all volition need to consummate Schedule E, which is office of Form 1023. The schedule will help the IRS determine the effective engagement of your exemption.[24]

  3. 3

    Complete Form 1023. Grade 1023 is the IRS form required to apply for recognition of exemption nether section 501(c)(iii) of the IRC. You lot must complete Parts I through Eleven and any required schedules. The schedules you will have to submit will depend on the type of organization you lot have. Parts I through Eleven need to include the following information:

    • The applicant's identification;
    • Your organizational structure;
    • Proof of required provisions in your organizing document;
    • A description of your activities;
    • Any financial arrangements you have with directors, officers, employees, etc.;
    • A list of individuals receiving benefits from you;
    • Your history;
    • Your specific activities;
    • Your financial data;
    • Your public charity condition; and
    • Your user fee information.[25]

  4. iv

    Pay the user fee. After yous complete Class 1023, you will need to file information technology promptly. When you file, you will pay what is called a "user fee." The user fee yous will pay will depend on your organization's almanac gross receipts. If your gross receipts have exceeded, or will exceed, $x,000 annually over a four-year period, the user fee will be $850. If y'all do not see that threshold, the user fee volition exist $400.

    • Your gross receipts will exist certified in Part 11 of Class 1023.

  5. 5

    Comply with IRS requests. Once you file, an IRS revenue enhancement specialist volition review your Form 1023 and may request additional information. If you lot get a written request for information, assemble the required data and submit it.[26]

  6. vi

    Receive your decision letter. One time the tax specialist determines that your organization meets the requirements for exemption, the IRS will send you lot a determination letter. This determination letter is an important document and yous should keep information technology with your other permanent records.[27]

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  1. 1

    Refrain from conducting prohibited activities. In lodge to receive and keep your tax exempt status, you lot must refrain from taking part in activities that could jeopardize your condition. For example, y'all may need to refrain from taking function in some or all of the following activities:

    • Participating in political campaigns;
    • Lobbying substantially;
    • Providing benefits to private individuals;
    • Operating for the benefit of private interests;
    • Conducting illegal activities or activities that violate public policy.[28]

  2. 2

    Keep skillful records. Your 501(c)(3) organization is required to keep in-depth books and records evidencing all your financial and non-financial activities. You should keep track of all grants and donations received; your employee information; and decisions made at lath meetings.

  3. 3

    Meet federal filing requirements. Every bit a 501(c)(3) organization, you lot volition exist required to file a number of documents with the IRS. Most importantly, you will be required to submit an data return (Form 990), which will provide the IRS with tax related information. This information will generally be available for public inspection.[29]

  4. 4

    Disclose all required information. In addition to your Form 990s beingness disclosed to the public, a number of other documents will be public as well. Your exemption application (Course 1023), your articles of incorporation, and certain information regarding charitable contributions must be documented and disclosed.[thirty]

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