Can my nonprofit apply for tax exemption if we are in the planning stages and do not have a budget?

The IRS does not grant tax exemption to organizations that do not have their programs budgeted. They require detail regarding your proposed activities to ensure you qualify as a 501(c)(3) organization.

Regarding Your Budget: Your Nonprofit budget needs to balance out each year on the document you submit to the IRS. Significant profits or losses will be a point of concern with the IRS. Significant profits will prompt the IRS to assume you may be operating as a for-profit corporation.

What is a 501(c)(3) public charity?
A 501(c)(3) public charity is an entity that: (1) has been organized under state law, (2) is operated for a 501(c)(3) purpose, (3) benefits an unidentified charitable class of people (e.g., those who suffer from AIDS), (4) engages in activities that are non-political in nature, and (5) derives at least one-third of its support from the general public. A 501(c)(3) purpose includes--but is not limited to--educational, religious, scientific, medical and charitable endeavors.
What steps are required to set up a 501(c)(3) public charity?
First, you must form a Nonprofit corporation in your home state. Second, your organization must adopt bylaws and obtain an employer identification number. Then, you must prepare and submit an application to the IRS that requests tax exempt status under Internal Revenue Code Section 501(c)(3). The application review process takes the IRS from 3-6 months.
How many board members does my Nonprofit organization need?

Initially, the founders and/or persons who oversee the operation of your Nonprofit serve as its board members. In most states, one person may serve as the sole director for incorporation purposes. However, when submitting a 501(c)(3) application or other type of tax exempt application, the IRS almost always requires at least three distinct individuals to serve on the board of directors.


Keep in mind, you may change your board from time to time and that your board may be "reasonably" compensated. In general, the IRS prefers directors who are volunteers. Don't worry if you initially only have one director. You'll have the chance to add more directors later.

How many officers do we need?

The IRS prefers that you select three individuals who are unrelated by blood or marriage. Keep in mind that officers may be "reasonably" compensated. For example, if an organization receives $100,000.00 in its first year, and an officer receives a $50,000.00 salary, the IRS would probably consider this an "unreasonable" amount.


Also, a Nonprofit corporation must report its payroll just as any other organization would be required to do.

Do the directors on my tax exemption application need to match the directors on my Nonprofit's articles of incorporation?

The IRS recognizes that changes may occur in your board from the time of incorporation to the time you submit your application for tax exemption. You need to simply make sure the directors on your Nonprofit application are current members of your board of directors.

Is my organization tax exempt once I file my Nonprofit articles of incorporation?
No. While Nonprofit status is granted by your state, tax exempt status is granted at the federal level by the IRS. You must complete a separate IRS application to be granted tax exempt status at the federal level.
Do we need to prepare a budget for our operations?

Absolutely. This is required by the IRS and will be reviewed in advance by the IRS. Each organization must submit a budget when applying for 501(c)(3) exemption. This budget must include a statement of the organization's expected revenue and expenses and a balance sheet that details the organization's first three years of operation. If you are a new organization, simply detail a good faith estimate of your anticipated income and expenses. Be practical and reasonable when making these estimations.

Can the officers of my Nonprofit corporation also serve as directors?

Yes. Generally, the board of directors elects officers to run the day-to-day operations. The IRS prefers you name at least three individuals to serve as officers.

It is perfectly acceptable, however, to elect company officers who also serve as members of your board. For example, you can have a director/president, a director/vice president and a director/treasurer.

Can the officers of my nonprofit corporation also serve as directors?

Yes. Generally, the board of directors elects officers to run the day-to-day operations. The IRS prefers you name at least three individuals to serve as officers.

It is perfectly acceptable, however, to elect company officers who also serve as members of your board. For example, you can have a director/president, a director/vice president and a director/treasurer.

Do we need to prepare a mission statement?

There is no legal requirement that you prepare a mission statement but you may find it helpful to have one for your internal operations.

I want to influence legislation, lobby or assist a certain political candidate. Can I be a 501(c)(3) tax exempt organization?

501(c)(3)s are prohibited from any type of political activity, unless it is to a slight, incidental extent. Even then, the activity is closely regulated. If you want to be a political organization, you can register for a 501(c)(4) organization, which covers social and welfare groups.


An example of a political organization is www.moveon.org. You may apply for tax exempt status under section 501(c)(4). However, donations are still not tax deductible for donors.

Does the IRS require salary information for tax exempt status applications?

The IRS wants to know what percentage of the overall budget is devoted to salaries. If salaries are large, the IRS may determine the Nonprofit is actually benefiting the salaried directors, not the Nonprofit's programs.


In addition, the IRS wants to see how much each board member is paid. Nonprofit applications must justify why these directors are being paid this amount. If the amount is too high, the IRS will probably ask you to provide justification for the salaries or ask you to revise the numbers downward.


People who are being paid by the Nonprofit are also considered "interested" persons. In other words, it is in their interest to approve pay increases for themselves, especially if they are directors. If a majority of the board members are compensated, the IRS perceives a risk of pay increases spiraling out of control.

Do I need to file anything at the state or local level to apply for tax exemption?

Many states automatically recognize any approved 501(c)(3) public charity as tax exempt.

How long will the IRS take to respond to my tax exempt status application?

The IRS response to a 501(c)3 application typically takes 3-6 months. While expedited service is available on a limited basis, it is not guaranteed.

How much does it cost to submit my tax exempt status application to the IRS?

The IRS charges a one time fee to review and approve your application. The filing fee is based on your projected budget. If you expect annual revenues of $10,000.00 or less in your Nonprofit's first three years, the filing fee will be $400.00. For an organization whose projected revenues exceed $10,000.00 per year, the filing fee will be $850.00.


Adjusting your budget downwards will probably not help you avoid the higher filing fee. The IRS may still ask you to pay the higher filing fee based on their review of your budget and proposed activities. If your budget and activities do not match, the IRS will instruct you to revise and resubmit your application with the higher filing fee.

Can the board of directors be related?

The IRS wants to ensure that the control of the Nonprofit is held by individuals focused on public benefit. According to the IRS, related directors, or those with common business interests (i.e., they own a business together), cannot make a disinterested vote.

Even if related directors are unpaid, the IRS may still ask the Nonprofit to revise the board to people who are unrelated.

Can I still be a nonprofit if I don't apply for tax exempt status?

Yes, you are a nonprofit corporation once you are filed with the state. However, your corporation will still be liable for federal (and maybe state) income taxes. Donations made to your nonprofit will not be tax deductible without tax exempt status. Further, it may also be difficult to obtain grants if you are not a 501(c)(3) organization.

What is the difference between a "private foundation" and a "public charity"?

Most people forming Nonprofit organizations prefer to set up a 501(c)(3) public charity because the opportunities for public donations are far greater. Private donors to a 501(c)(3) "public charity" may donate up to 50% of their adjusted gross income. Donors to a "private foundation" can only donate up to 30% of their adjusted gross income.


Ultimately, the IRS will look at an organization's primary source of financial support to determine if it qualifies as a public charity or a private foundation. In general, if an organization derives its support from a relatively few number of people, the IRS will classify the organization as a private foundation. If the organization's source of support is large and varied enough, the IRS will usually classify the foundation as a public charity.

Can I start a nonprofit for the benefit of one person?

No. Nonprofits must benefit the public. To create a legal entity to help out one individual, seek the advice of an attorney to start a trust.

Is it difficult to set up a 501(c)(3) public charity, private foundation or other type of tax exempt organization?

Most people forming Nonprofit organizations prefer to set up a 501(c)(3) public charity because the opportunities for public donations are far greater. Private donors to a 501(c)(3) "public charity" may donate up to 50% of their adjusted gross income. Donors to a "private foundation" can only donate up to 30% of their adjusted gross income.


Ultimately, the IRS will look at an organization's primary source of financial support to determine if it qualifies as a public charity or a private foundation. In general, if an organization derives its support from a relatively few number of people, the IRS will classify the organization as a private foundation. If the organization's source of support is large and varied enough, the IRS will usually classify the foundation as a public charity.