Many foundations provide grants only to 501(c)(3) organizations. Therefore, obtaining 501(c)(3) status is often the first step inapplying for grant funds. Below is a list of Frequently Asked Questions regarding 501(c)(3) status and what it means for your organization. The Grant Helpers can assist you in applying for this status, and can walk you through other steps to make your organization more desirable to possible funders.
What does the 501(c)(3) status mean?
Organizations that are classified as 501(c)(3) organizations by the IRS are exempt from federal taxes, and possibly state corporate income taxes. Additionally, donations and contributions made to the organization are tax-deductible for the donors. This can make donating to the organization more attractive.
Why is 501(c)(3) status important when applying for a grant?
Grants from governmental entities and private foundations often require 501(c)(3) status, so the status is necessary to receive such funds. This status also gives the organization the public legitimacy of IRS recognition, an important factor when grant makers are determining funding.
What are the requirements to receive an 501(c)(3) exemption?
Organizations that are labeled 501(c)(3) are usually referred to as charitable organizations. The entity must be organized exclusively for charitable, educational, or scientific purposes. To be eligible, the entity must be organized as a corporation, which could be a limited liability company, a trust, or an association. The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization's net earnings may benefit any private shareholder or individual. Additionally, the organization must not have the sole intent of influencing legislation, and it may not participate in any campaign activities for or against political candidates. Organizations that receive this status are also limited in how much political and legislative lobbying they may perform.
Can churches, religious organizations, or private foundations receive the exemption?
Yes, as long as the organization meets the requirements mentioned above.
What is the process to receive the 501(c)(3) designation?
Organizations seeking to receive the 501(c)(3) designation must complete three steps. First, the organization must apply for and receive an Employer Identification Number (EIN). An EIN can be applied for in a variety of ways, including through the IRS website. Receiving your EIN is a free service.
Second, the entity needs to incorporate with the appropriate state and local agency or agencies. The IRS requires that your incorporation documents include specific language referring to your charitable purpose. Further, the organization must establish by-laws, which also must refer to your charitable purpose.
Once these two steps are completed, the organization can then apply for tax-exempt status from the IRS. The form currently required by the IRS is Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, which can be found on the IRS website. A fee is required when applying for tax-exempt status. This fee is based on the organization’s gross receipts.
A note of caution, however: The IRS currently has a backlog of these applications to review, and application approval could take more than a year.
What is the difference between nonprofit and tax-exempt status?
A nonprofit determination is a state law concept, whereas the tax-exempt status is determined by the IRS. Most federal tax-exempt organizations are indeed non-profit organizations, but being a nonprofit does not automatically grant the organization tax-exempt status.
The team of Grant Helpers can assist you at all stages from the initial development of your organization and its programs to finding financial support to implementing grant funding. See our complete list of services to see how we can help you.
Photo credit: Horia Varlan