What are the benefits of 501(c) status?
When you start an organization whose purpose is improving the welfare of society, the government assists you in your purpose by reducing the financial burden of taxes.
Obtaining 501(c) status gives several major benefits:
- Exemption from Federal Income Tax
- Ability to receive tax-deductible charitable donations
- (Sometimes) Exemption from employment taxes
Not only does this reduce your financial burden, it also acts as a seal of approval. It communicates to people and corporations that your organization is an approved tax-exempt non-profit. This opens the opportunity for grants and donations that will be essential to keeping your non-profit afloat.
Who is eligible to claim 501(c) status?
Any organization that is formed and run for the benefit of society, not for the purpose of getting rich.
“A not-for-profit (i.e., nonprofit) organization must be organized and operated exclusively for one or more exempt purposes. [Such as] as charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.”
-IRS Publication 4220 on 501(c) Status
Step 1: Form a Nonprofit Corporation
Forming a corporation offers legal and tax advantages, while also protecting the members from legal action. This is one of the most common ways to begin a non-profit. There are several key steps to actually becoming a non-profit corporation.
Here are the initial steps:
- – Submit Articles of Incorporation to the State.
- – File for a Federal Tax ID Number (FEIN) from the IRS through Form SS-4 or via phone at 1-800-829-4933.
- – Establish bylaws by which the board of directors will be governed.
Step 2: Aquire 501(c) Status
After your organization is officially formed, you can apply for 501(c) status by filing either Form 1023 or Form 1023-EZ. If you want even more assistance, there is also Form 1023-I (Interactive) which provides more step-by-step guidance.
Tip: You can also receive the benefits of 501(c) status without jumping through all the IRS hurdles by affiliating with an existing registered 501(c). But note: it requires handing over control and authority of your organization to that 501(c).
Step 3: Done.
That’s it. While it may seem intimidating, it is actually much simpler than you might expect. Sometimes the IRS takes a while to grant 501(c) status, but while you are awaiting approval you may function as a tax-exempt organization. Approval as a 501(c) is back-dated to the date the organization was formed.
If you have more questions, the IRS has published a very clear and thorough document Publication 4220 that addresses all aspects of forming a 501(c). If you’re looking for help with the process, we’d love to answer any questions you have at DB Accounting. Call us at 719-351-3094 or send an email to firstname.lastname@example.org.
About The Author: Tierney Stigall
Tierney is the principal accountant at DB Accounting & Tax Services. She has over 20 years experience handling tax and accounting for businesses of all sizes.
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