On July 1, 2014, the IRS introduced a shorter, easier to understand form to apply for the coveted 501©(3) tax exempt status. Now is the ideal time to start the nonprofit organization you have always dreamed of. The traditional form, Form 1023, is 26 pages long, and can take months of preparation to properly answer all of the questions, and apply. The new 1023-EZ is only 3 pages long, and can be prepared and completed with just a couple of weeks preparation max. The IRS actually created this new short form to help ease the current backlog of 1023 applications pending. The approval process for a the Form 1023 can take the better part of a year or longer, while the IRS is estimating approval within just a few months, depending on demand.
This is a big step for the IRS – not often do they make things easier for us. Finally, they recognize that small charities need not provide the same level of detail in the application process as large-scale charitable organizations. The new 1023-EZ Form must be completed online, and submitted with a $400 application fee. Large organizations still have to go through the same long Form 1023 for approval; this new form is only for small charitable organizations that meet the following guidelines:
To Qualify for New IRS Form 1023-EZ
- Annual gross receipts of $50,000 or less
- Assets of $250,000 or less
- Organization must be operated specifically for charitable purposes only
Types of 501© (3) Organizations
- Public charities: Funded by the public, or by government entities, public charities must receive at least one-third of donated revenue from a broad base of public support. Public support can be donations from individuals, corporations, and other charities.
- Private foundations: A private foundation, or a non-operating foundation, does not have current active charitable programs. A good example is a family foundation, governed closely by trusted advisors, or members of the family.
- Private operating foundations: This designation is the least common, but do have active charitable programs like a public charity, but can be closely held like a private foundation.
Benefits of the 501©(3) Status
- Exemption from Federal income tax
- Eligibility to receive tax-deductible charitable donations from individuals and corporations
- Potential for local and state tax exemptions, depending local laws.
Types of Activities Prohibited and Operational Guidelines
- Political campaigns
- Lobbying is limited
- Earnings cannot inure the benefit of any private shareholder, individual, founder or founder’s family
- Cannot operate for primary purpose of conducting a business that is not related to exempt purpose
- Cannot have purposes or activities that are illegal at the Federal, State or Local level
Record-keeping and Reporting
To maintain the 501©(3) status, organizations must keep outstanding records, and report as required. Below are the requirements:
- Keep books and records detailing all activities (financial and nonfinancial)
- Financial information must include details on the sources of income (contributions, grants, sponsorships, fundraising, and other forms of revenue)
- Filing of Annual Information Return (Form 990, Form 990-EZ or Form 990-PF, and any required schedules)
- Must make the 501©(3) application and all annual returns available to the public for inspection upon request, for a three year period.
Even with the new shortened form, the documentation, record-keeping and reporting can be daunting, even for small charitable organizations. For assistance in setting up and meeting the ongoing reporting needs, consult with Barry Bandler Accounting & Tax Services.
