501(c)(3) status: what it takes to become tax-exempt

The 7 Rivers Region has a rich tradition of philanthropy.  It also has its share of nonprofit organizations anxious to receive philanthropic funds.  From charities for children and education to the arts and humanities, our neighbors want to do good in our communities.

Many of these nonprofit organizations have what’s called 501(c)(3) status — an increasingly popular designation.  That’s a reference to their tax-exempt status within the Internal Revenue Code.  Organizations that qualify may avoid federal and state income, property, excise, use and sales taxes, and people who donate to them may deduct their charitable donations from their own federal income taxes.  Organizations with 501(c)(3) status also are eligible to receive private foundation grants and qualify for lower postal rates on third-class bulk mailings through the U.S. Postal Service.

The 501(c)(3) status applies specifically to charitable, scientific, literary/arts, education and religious organizations.  Other tax-exempt codes apply to other types of nonprofit organizations and activities, such as 501(c)(4) for amateur athletic events, 501(c)(5) for labor and agricultural organizations or 501(c)(14) for credit unions.  Each carries different requirements but all are designated for entities where proceeds go back to benefit the mission of the organization.

Qualifying for 501(c)(3) status is not easy.  The IRS is very careful about granting tax-exempt status and requires a lengthy application process — not to mention extensive record-keeping in order to maintain tax-exempt status.  And they do monitor these charitable organizations closely.  They want to be sure no personal benefits are going to the officers and that the organization is not serving as a shell to help people avoid paying duly owed taxes.

To obtain (501(c)(3) status, you must first form a non-stock corporation by filing articles of incorporation with the Wisconsin Department of Financial Institutions (see http://www.wdfi.org/corporations/forms).  To complete the corporate formation process, the organization will need to adopt bylaws and obtain a Tax Identification Number from the IRS.  Once the non-stock corporation is formed, the IRS has a 15- to 20-page application to complete.  The application explores how you will raise funds, where funds will come from and how they will be used, the activities and purpose of the organization, background of officers and directors and a host of other information.

Once the application is filed — with a filing fee ranging from $400 to $850 — the waiting begins.  It usually takes 90 to 120 days for the application review process, and it’s not uncommon for it to be returned because portions of the application are unclear.  Typically, the IRS will give applicants an opportunity to clarify and provide additional information. If the IRS denies tax-exempt status, you can retool and submit a new application (and additional fee).

An experienced corporate attorney can be a great ally in the process.  He or she can help you determine whether you meet the rigorous standards and ensure your initial application is as thorough and compelling as possible, helping you avoid a repeat filing and accompanying fee.  That attorney can also help with the annual compliance work involved to maintain your hard-won 501(c)(3) status.

To learn more about the process, see IRS publication 4220 Applying for 501(c)(3) Tax-Exempt Status.  You can also learn more online at https://www.irs.gov/charities-and-nonprofits.

To learn more about forming nonprofit and for-profit corporations, contact Brandon Prinsen at 608-784-5678.