Welcome back to the Starting Your Nonprofit blog series, a four part blog based on my book Starting Your Nonprofit: A Workbook to Guide You Through a Million Exciting Tasks.
When I was starting Idle Tuesdays Recording Studio, a Los Angeles-based 501(c)(3) nonprofit organization, I was also working towards a master’s degree in Nonprofit Management. Even though I was getting an advanced degree in nonprofit management, starting a nonprofit wasn’t easy. I was learning all about managing a nonprofit, but nothing about starting one. Like everybody else, I Googled “how to start a nonprofit organization.” The top search results were paid ads from companies basically saying I wasn’t smart enough to do it on my own and that I should pay them to do “it” for me. I didn’t even know what “it” was. The lower search results were overly-simplified bullet point lists on how to start a nonprofit. Those didn’t impress me either.
After reading everything I could find online, I set out to start a 501(c)(3) nonprofit organization on my own. Some things I did correctly, others I botched and had to correct. But I did it! Starting a nonprofit was like fighting an invisible giant. I never set out to write a “how to” book on starting a nonprofit organization, but I figured I could create a better, more simplistic resource than what I was finding.
I simplified the process into 11 steps, 12 months and about $1000!
If this is the first part you’ve come across, I suggest reading Part 1 and Part 2 before continuing. This blog series is a summary of Starting Your Nonprofit and is meant to introduce you to the eleven steps of starting a nonprofit. Purchase the book for the full version, including detailed state-specific information, and receive a free 30 minute Skype consultation.
Between Part 1 and Part 2, I went over the first six steps of starting a nonprofit. Here are the next two:
Step 7: Apply for your federal tax exemption
Tax exemption is the crux move in starting your nonprofit, and this is the only way to obtain it. Obtaining federal “tax exemption” means your organization is not required to pay income tax on donations, grants, etc. (You’ll need to apply for state tax exemption later).
Complete IRS Form 1023-EZ Eligibility Worksheet.
This worksheet is six pages long and will determine whether you need to file Form 1023-EZ (first released July 1, 2014) or the much longer Form 1023. Form 1023-EZ is three pages long, asks twenty-six questions, is filed online, and costs four hundred dollars to file. Alternatively, Form 1023 is twenty-six pages long, asks a lot more questions, and costs between four hundred and eight hundred fifty dollars to file.
Visit www.pay.gov if you are eligible to file Form 1023-EZ
Create an account then type “1023-EZ” in the top left search field. Click the red “Continue to the form” button. You will be taken to a screen notifying you the IRS accepts ACH (payment via your bank account), credit card, and debit card payments. Click the red “Continue to the form” button. This will take you to the online form. Fill in the blanks and follow the prompts. Be prepared to pay the filing fee of four hundred dollars.
Processing time: approximately 30 days
When you complete IRS Form 1023-EZ Eligibility Worksheet and find you do not qualify for the short form, you must complete and submit the full-length Form 1023. Download, print and complete. Form 1023 must be snail-mailed and cannot be filed online. You may also be required to complete one of the following Schedules:
- Schedule A. Churches
- Schedule B. Schools, Colleges, and Universities
- Schedule C. Hospitals and Medical Research Organizations
- Schedule D. Section 509(a)(3) Supporting Organizations
- Schedule E. Organizations Not Filing Form 1023 Within 27 Months of Formation
- Schedule F. Homes for the Elderly or Handicapped and Low-Income Housing
- Schedule G. Successors to Other Organizations
- Schedule H. Organizations Providing Scholarships, Fellowships, Educational Loans, or Other Educational Grants to Individuals and Private Foundations Requesting Advance Approval of Individual Grand Procedures
If your annual gross receipts are less than $10,000, be prepared for a $400 filing fee. Most new, start-up nonprofits would fall into this category. If your annual gross receipts are more than $10,000, be prepared for an $800 filing fee. This would apply to organizations already in operation. Confirm the exact filing fee before submitting your form…the IRS tends to increase filing fees over time. Send a copy of your Articles of Incorporation and adopted bylaws with your application. If the IRS does not reply within 180 days, call 1-877-829-5500 to follow up.
All organizations, in all fifty states, seeking nonprofit status must apply for federal tax exemption in this way.
Step 8: Receive your IRS determination letter
This is the easiest step because all you have to do is wait. You cannot move forward without it.
When your application is approved, you will receive a snail mailed letter from the IRS stating your corporation is tax exempt. The “Effective Date of Exemption” is retroactive and will be the date your state’s filing office approved your Articles of Incorporation. Save this letter for the lifetime of your organization. It’s also handy to have a PDF version available because it’s common for foundations, businesses, donors, etc. to request proof that your organization is indeed recognized by the IRS as a 501(c)(3) nonprofit organization.
Congratulations! Your corporation is now a federally recognized 501(c)(3) nonprofit organization!
PS – When I filed Idle Tuesdays’ Form 1023 (Form 1023-EZ wasn’t offered yet), I received a letter from the IRS requesting “additional information.” If you receive a similar letter, don’t worry. Collect the information being requested and reply as soon as possible.
Stay tuned for Part 4 of the Starting Your Nonprofit blog series! I’ll go over the last three steps of starting your nonprofit.
You have what it takes. You’re smart enough. You’re good looking enough. Your personality is enough. The money will come. Champion the cause, and be the answer! Start filling those gaps and solving those problems. You’re the solution!