If your nonprofit organization is looking to be exempt from federal taxes, you must fill out Form 1023. Just a fair warning, it’s a long, laborious process to complete this 31-page form, especially if you’re doing it yourself. That’s why we compiled some of the most frequently asked questions we’ve received over the past couple of years. If there’s a question you don’t see, feel free to contact us and we’ll be glad to assist you.
Part I – Identification of Applicant
Can I submit Form 1023 without an Employee Identification Number (EIN)?
For question 10, how can my organization be excluded from filing Form 990 or Form 990-EZ?
Your organization’s annual gross receipts must be no more than $25,000. Also, certain organizations such as churches, church-affiliated organizations and affiliates of a governmental unit are exempt from filling out Form 990 or Form 990-EZ.
Part II – Organizational Structure
Are partnerships eligible to fill out Form 1023?
No. Corporations, unincorporated associations, and trusts are the only types of organizations that can file Form 1023. If you operate a limited liability company (LLC), then your LLC will be treated as a corporation.
What are bylaws?
Essentially, bylaws are the internal rules and regulations of your organization. You’re required to adopt bylaws if you want your entity to become tax-exempt. Even though you can answer “no” to question 5 and provide a written explanation instead of your bylaws, the IRS will most likely reject your request for tax-exempt status.
Part III – Required Provisions in Your Organizing Document
What is a dissolution clause?
A dissolution clause states how an organization will handle its shutdown if the situation arises. This clause specifies how and where your organization’s assets will be distributed. You can only distribute your assets for exempt or public purposes mentioned in section 501(c)(3).
Part IV – Narrative Description of Your Activities
How detailed should my description be?
Your narrative should contain at least five to seven paragraphs answering these questions provided by the IRS:
- What is the activity?
- Who conducts the activity?
- When is the activity conducted?
- Where is the activity conducted?
- How does the activity further the organization’s exempt purposes?
- What percentage of the organization’s total time is allocated to the activity?
- How is the activity funded?
Here is an example to help you get started on your narrative. You can also attach newsletters, brochures, or other supporting documents to substantiate your narrative.
Part V – Compensation and Other Financial Arrangements with Your Officers, Directors, Trustees, Employees, and Independent Contractors
Why does Form 1023 ask about compensation?
The IRS is looking for any activity that does not align with the provisions under section 501(c)(3). If you pay anyone, you must include all compensation such as salary, wages, deferred compensation, retirement benefits, fringe benefits, education benefits, low interest loans, payment of personal expenses, and bonuses. Otherwise, you must put “not applicable” in the appropriate boxes.
Why is a conflict of interest policy important for an organization?
The IRS wants to ensure that your organization has an established plan when conflicts of interest arise among your directors, officers, or trustees. As a result, a conflict of interest policy can help protect your tax-exempt status and reputation with the public.
Part VI – Your Members and Other Individuals and Organizations That Receive Benefits from You
What is the purpose of this section?
The purpose of this section is to make sure your organization operates for public purposes and not solely for the private interests of your members or other individuals and organizations.
Part VII – Your History
What does a successor mean, and why does Form 1023 ask about it?
According to the IRS, your organization is a successor if you have:
- Taken over all the assets or activities of another organization.
- Been converted or merged from another organization.
- Installed the same officers, directors, or trustees as another organization that no longer exists and that had purposes similar to yours.
In general, the IRS wants to make sure the shareholders or individuals associated with the predecessor organization do not gain any benefits from the successor organization.
What if it took me over 27 months from my organization’s first month of formation to apply for tax-exempt status?
As it says on Form 1023, you must complete Schedule E and provide a detailed explanation as to why it took you over two years to fill out Form 1023. If your organization receives tax-exempt status after the 27-month deadline, your status is only recognizable from the filing date forward.
Part VIII – Your Specific Activities
What is the purpose of this section?
The IRS is making sure the activities you conduct or plan to conduct correlate with the provisions under section 501(c)(3). For example, the first question asks, “do you support or oppose candidates in political campaigns in any way?” Your answer should be “no” because participating or intervening in a political campaign is prohibited for 501(c)(3) organizations.
For question 4a, how far into the future do projected fundraising efforts need to be?
Your future fundraising efforts need to be confirmed and planned. They cannot be tentative or speculative.
For question 15, what does a “close connection” with an organization specifically mean?
According to the IRS, you have a close connection with another organization if any of the following situations are applicable:
- You control the organization or it controls you through common officers, directors, or trustees, or through authority to approve budgets or expenditures.
- You and the organization were created at approximately the same time and by the same people.
- You and the organization operate in a coordinated manner with respect to facilities, programs, employees, or other activities.
- People who exercise substantial influence over the other organization and you either conduct activities in common or have a financial relationship.
Part IX – Financial Data
What if I’m just starting my organization and have no financial data to record?
You need to project your likely revenues and expenses for the current year and the succeeding two years. For the best results, it’s recommended to hire a financial expert – like one of our dedicated accountants – to help formulate reasonable projections for your organization.
Part X – Public Charity Status
What is the difference between public charities and private foundations?
Public charities mainly receive donations from the public and governmental units. Churches, schools, hospitals, medical research organizations, publicly supported organizations, and certain supporting organizations are automatically considered public charities.
On the other hand, private foundations are operated by a family or small group of individuals, and they obtain most of their financial support from a few sources. Since private foundations are seldom in the public eye, they are subject to more operating restrictions than public charities.
Part XI – User Fee Information
How do I pay my user fee? Where do I send it?
You can pay your $400 or $850 via check or money order. Once you attach all your materials, send your completed Form 1023 to:
Internal Revenue Service
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011
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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.