There are all kinds of fantastic nonprofits in the world, from well-established efforts like Habitat for Humanity that builds housing for the poor and World Wildlife Fund that protects the planet’s diversity, to lesser-known organizations like the Give Back Yoga Foundation that helps people like prison inmates learn nonviolent problem resolution and first-responders cope with job stress, and the Cary Creative Center that promotes recycling discarded materials to be used for creating art in its North Carolina community.
While these organizations have wildly differing missions and goals, they all had to jump through the same series of hoops to achieve 501(c)3 tax-exempt status. And they all had varied experiences as they learned how to start a nonprofit organization
Obtaining 501(c)3 tax-exempt status is a crucial part of setting up your nonprofit, as it allows you to attract the donors and the funding that you’ll need to run your nonprofit and truly make the impact you want. Having that “501(c)3” stamp means the Internal Revenue Service has approved your nonprofit as a tax-exempt, charitable organization. And by “charitable,” that can be defined as established for an educational, environmental, public safety, amateur sports, or other designated purpose.
Two key benefits of obtaining 501(c)3 tax-exempt status are that your nonprofit can accept contributions and donations are tax-deductible to your donor. When donors give, they can also take a deduction.
It’s easy to see why obtaining this status is so desirable. It’s also easy to see why it’s so challenging too. The steps involved are complicated, expensive, and time-consuming. We created Yippiekiyay because we’ve navigated these turbulent waters before, and we want to make it easier for organizations and individuals interested in building their nonprofits and doing the good work they’re passionate about.
There are two main steps to obtaining your 501(c)3 tax-exempt status: completing your state government’s forms and filling out the federal government’s forms. Doesn’t seem too tough, right? But IRS approval could take up to 12 months. And often the process includes detailed follow-up questions that you’re obligated to answer.
Delays like these depend on the volume of applications being received as well as how long it takes for a particular application to be assigned to a review agent. But often frustrating waits can be avoided by some simple steps, like checking and double-checking that you’ve provided complete information, paid your fees to the right place, and paid the correct amounts.
When applying for 501(c)3 status, you must make it clear in the application whether you are applying as a corporation or not. This means you must include a complete copy of your “articles of incorporation” and show that it has already been filed with and approved by your state. If you’re not incorporating, you still must provide a similar sort of organizing document—such as bylaws, a constitution, or articles of association. And keep in mind that at least two members of the organization must sign the document, and the organizing document has to comply with the “organizational test” for exemption.
To comply with the Internal Revenue Code, your nonprofit must be organized and operated exclusively for tax-exempt purposes. It will be subjected to a two-part “organizational” and “operational” test. This means your nonprofit’s charter paperwork will be scrutinized and its express purpose as set forth in its articles of incorporation (e.g., “exclusively for charitable, religious, and educational” purposes) will be evaluated. With the operational test, they want to see that you’ve laid out exactly what your nonprofit will engage in and that these activities accomplish one or more of the Section 501(c)(3) exempt purposes.
Even if your nonprofit meets those Section 501(c)(3) purposes, your activities must primarily further those purposes in order to qualify for or retain tax-exempt status. For example, if your nonprofit is organized for charitable purposes like running an afterschool reading program for underserved students, it also needs to be operated as an afterschool reading program.
This is just one component of the process, and it can be fraught with complications. The devil, as the saying goes, is certainly in all these details.
The actual fees for filing your nonprofit’s 501(c)3 application forms are not too prohibitive. Standard filing fees run about $800, though it’s just half that figure if your nonprofit is small and anticipated revenue hovers below $40,000.
What gets pricey is the cost of hiring experienced advisers or professionals to get the application packet right. Paying CPA’s and attorney’s fees can add up, especially if you’ve filled out forms improperly or paid the wrong fee and have to go back to the drawing board and start the process over again—which can and does happen when dealing with such complicated forms.
CPAs and attorneys specializing in small nonprofit organizations can charge between $2,500 and $5,000 for preparing tax-exempt status applications, and $6,000 to $15,000 for more complex organizations and efforts.
Beyond monetary fees, another expense comes in the form of your time. By IRS estimates, first-time applicants will need to devote more than 100 hours to properly prepare their 501(c) 3 package. While you might have a patient personality and an eye for detail that lends itself to filling out forms and managing the minutiae of IRS paperwork, if it’s not something you take pleasure in, the hours might begin to take a toll.
As you follow your passion and launch your nonprofit, we hope you’ll keep Yippiekiyay in mind. Let us join you on your journey from amazing “idea” to obtaining IRS approval. Our step-by-step approach can help you avoid infuriating delays, make sense of complicated paperwork, and do it without having to pay expensive fees. Contact us today.