A 501(c)(3) determination letter is a document issued by the IRS to a non-profit organization that has been approved for tax-exempt status stipulated in section 501(c)(3) of the Internal Revenue Code. This letter serves as proof of the tax-exempt status of an organization and is required for donors to claim tax deductions on their contributions. In essence, the determination letter is the official notification that an organization is exempt from federal income tax. To obtain a 501(c)(3) determination letter, individuals and organizations must follow a specific set of steps to meet IRS requirements. Here is a breakdown of the process, which includes: The organization must have a specific purpose to obtain a 501(c)(3) determination letter. The IRS recognizes seven types of organizations that qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. These include religious, charitable, scientific, literary or educational organizations, organizations that test for public safety, organizations that foster national or international amateur sports competitions, and those that prevent cruelty to children or animals. The purpose of the organization must exclusively serve one or more of these purposes and should not be designed to profit an individual. Additionally, it should provide a public benefit. After determining that the organization meets the IRS requirements, the next step is to form a corporation. The process varies by state, but generally, it involves naming the corporation, filing articles of incorporation, appointing board of directors, holding a directors meeting, and getting a state tax identification number. Naming the corporation involves choosing a unique and permissible name. The articles of incorporation are the documents that create the corporation, and they outline the structure and purpose of the organization. The directors oversee the organization, advise management, and make key decisions such as hiring and firing executive officers. A record book should be started to keep minutes from meetings with the directors, along with any other relevant documents or bylaws. A state tax identification number is necessary for the corporation, even if it does not pay taxes. It is also recommended to create a business plan, as the organization must operate in the black if it wants to keep running. What Is a 501(C)(3) Determination Letter?
How to Obtain a 501(c)(3) Determination Letter
Choosing a Purpose
Forming a Corporation
Nonprofits can make money but must use those profits to further the public purpose of the organization. By contrast, a private corporation exists to enrich its employees, managers, and shareholders.
Filing Paperwork With the IRS
Once the corporation has been formed, individuals can apply for tax-exempt status with the IRS.
The first step is to apply for a federal employer identification number (EIN), which is required for all tax-exempt organizations, even if they do not have employees. The EIN can be obtained online through the IRS website, by phone, or by mailing or faxing Form SS-4.
The next step is to complete and submit Form 1023 or the Application for Recognition of Exemption.
This is an 11-page form that can only be done online and requires detailed information about the organization, including its history, purpose, and activities.
Depending on the type of organization, individuals must also fill out one of the attached schedules, such as Schedule A for churches or Schedule B for schools, colleges, and universities.
Receiving the Determination Letter
After submitting the application, the IRS will review it and issue a determination letter either granting or denying tax-exempt status.
The process typically takes three to five months but may take longer if the IRS requires more information. If the application is denied, individuals can appeal the decision.
Maintaining Tax-Exempt Status
To maintain its tax-exempt status, the organization must comply with IRS regulations. These regulations include filing annual reports with the IRS detailing the activities, finances, and governance of the organization.
Non-profit organizations must also comply with various other regulations, such as restrictions on lobbying and political activities.
How Long Does it Take to Receive a 501(c)(3) Determination Letter?
The processing time for a 501(c)(3) determination letter varies depending on the complexity of the application and the workload of the IRS.
Generally, it can take three to six months for the IRS to issue a determination letter. However, the processing time can be longer if the application is incomplete or the IRS requests additional information.
Factors that may affect the processing time include the type of organization, the size of the organization, the complexity of the activities, and the completeness of the application.
If an organization fails to submit its application for exemption within the 27-month period after the end of the month in which it was formed but still meets the criteria for tax-exempt status, it can still be granted exempt status.
The date of the postmark on the application or the submission date of Form 1023, Form 1023-EZ, Form 1024, or Form 1024-A (if applicable) will be considered as the date of recognition of exemption.
Importance of Keeping a 501(c)(3) Determination Letter
Keeping a 501(c)(3) determination letter is essential for organizations that want to maintain their tax-exempt status. The letter serves as proof of the tax-exempt status of the organization and may need to be presented to donors, lenders, and government agencies.
For example, a donor may require a copy of the determination letter to claim a contribution tax deduction. Similarly, lenders may require a copy of the determination letter to verify the financial status of the organization.
Finally, government agencies may request a copy of the determination letter to verify the tax-exempt status of the organization.
Obtaining Copies of a 501(c)(3) Determination Letter
Organizations may need to obtain copies of their determination letter for various reasons, such as lost or damaged documents or changes in leadership.
Organizations can download copies from the online search tool Tax Exempt Organization Search (TEOS) to obtain a determination letter.
Alternatively, individuals can submit Form 4506-B or the Request for a Copy of Exempt Organization to request a copy of their original determination letter.
Maintaining 501(c)(3) Tax-Exempt Status
Once an organization has obtained a 501(c)(3) determination letter, it must maintain its tax-exempt status by complying with certain requirements.
These requirements include filing annual information returns with the IRS, such as Form 990 or Form 990-EZ.
These returns provide information about the activities and finances of the organization and help ensure that the organization continues to meet the requirements for tax-exempt status.
In addition to annual reporting requirements, organizations must also comply with other obligations, such as restrictions on political activities and the prohibition of private inurement.
Final Thoughts
A 501(c)(3) determination letter is a critical document for non-profit organizations seeking tax-exempt status under section 501(c)(3) of the Internal Revenue Code.
Obtaining a determination letter involves completing an application and paying a fee to the IRS, and the processing time can vary depending on various factors.
Organizations that have obtained a determination letter must maintain their tax-exempt status by complying with annual reporting requirements and other obligations.
Keeping a copy of the determination letter is crucial for organizations that want to maintain their tax-exempt status and may need to present the letter to donors, lenders, and government agencies.
If you need assistance obtaining or maintaining your 501(c)(3) tax-exempt status, it may be helpful to seek the advice of a qualified tax professional. They can guide the application process, compliance requirements, and other important matters.
501(c)(3) Determination Letter FAQs
A 501(c)(3) determination letter is an official document issued by the Internal Revenue Service (IRS) that confirms that a nonprofit organization is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.
A 501(c)(3) determination letter is important because it serves as proof that a nonprofit organization is tax-exempt. This status allows the organization to receive tax-deductible donations, apply for grants, and avoid paying federal income taxes.
To apply for a 501(c)(3) determination letter, you must first form a nonprofit corporation in your state, then apply to the IRS by completing and submitting Form 1023 or Form 1023-EZ.
The processing time for a 501(c)(3) determination letter varies, but it usually takes between three to six months for the IRS to review and approve an application.
Yes, a nonprofit organization can lose its 501(c)(3) tax-exempt status if it fails to comply with IRS regulations or engages in prohibited activities such as excessive lobbying or political campaign intervention.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
