How To File for Tax Exemption Under Section 501(a)

Section 501(a) of the Internal Revenue Code is a broad tax exemption provision granted to qualifying organizations. 501(c)(4) social welfare groups and 501(c)(3) charities are some of the most common categories filing under it. Successfully filing for this exemption allows non-profits and other organizations to bypass federal income tax, attract tax-deductible donations, and qualify for grants to sustain their long-term missions.

Non-profit organizations and charitable entities should use this guide to learn how to choose the right application, step-by-step filing instructions, and what to expect after you apply.

What Is Section 501(a) Tax Exemption?

It's important to understand Section 501(a) and the concept of tax exemption before applying. Under Section 501(a), certain qualifying entities can be recognized as exempt from federal income tax.

The IRS distinguishes several types of tax-exempt entities. These can include private foundations, public charities, and social welfare organizations. Each qualifying organization serves diverse purposes, from advancing education and relieving poverty to promoting social welfare and supporting charitable causes.

Who Qualifies for Tax-Exempt Status Under 501(a)

To qualify, you must be organized for an exempt purpose, have no private inurement, adhere to restrictions on political and lobbying activity for 501(c)(3) organizations, and obtain an EIN.

To obtain tax-exempt status for your non-profit organization or charitable entity, prepare and file Form 1023 or Form 1023-EZ. Some private foundations and specific entity types like churches, schools, and hospitals face additional requirements or are ineligible to use Form 1023-EZ.

Choosing the Right Application: Form 1023, Form 1023-EZ, or Form 1024

One of the first things you'll do as part of the tax exemption process is select the form that applies to your organization.

How to File for Tax Exemption Under Section 501(a)

Step 1: Get an EIN

You need to obtain an EIN to incorporate your non-profit with your state. You will also need it to apply for grants, accept donations, and open a dedicated organization checking account.

Applying for an EIN online with the IRS is fast and free.

Step 2: Confirm eligibility

Ensure that you have a qualifying organization that meets the criteria for tax exemption. Generally, organizations falling under Section 501(c) of the Internal Revenue Code are eligible. This includes non-profit organizations, religious entities, and educational institutions.

While they can apply, certain political organizations and private foundations may face additional requirements.

Step 3: Choose the right form

Once eligibility is confirmed, you must select the appropriate form for your application. The two primary options are Form 1023 and Form 1023-EZ. Form 1023 is more detailed and comprehensive, suited for larger tax-exempt entities. Form 1023-EZ is a streamlined version designed for smaller, less complex entities.

Step 4: Prepare the necessary documents

Gather required supporting documents, including your organization's Articles of Incorporation, bylaws, financial statements, and a narrative description of your activities. Ensure that your paperwork is complete, as it lays the foundation for a successful application.

Step 5: Complete and submit the application

Pay careful attention to every question and respond truthfully and accurately. Provide clear, concise explanations for your organization's mission, activities, and financial details.

Submit your completed application via Pay.gov with the appropriate fee ($600 for Form 1023, and $275 for Form 1023-EZ). The IRS will carefully review your application, conducting due diligence to ensure your organization complies with the requirements to obtain your tax exemption.

After You Apply: What to Expect

Form 1023 processing times usually take between three and nine months, while Form 1023-EZ processing times are usually two to four months. Once reviewed, the IRS will send a determination letter.

The determination letter formally recognizes your organization's tax-exempt status under Section 501(a). This official document serves as legal proof of exemption. It confirms that your entity is excused from paying federal income taxes if you receive an adverse determination letter indicating that your request was rejected.

To receive retroactive tax-exempt status from the date of your formation, you must file the appropriate form within 27 months from the end of the month your non-profit was legally organized. Missing it means your status will only apply from the postmark date forward.

Maintaining Your Tax-Exempt Status

As you make your way through the tax exemption filing process, keep these points in mind:

• Compliance is Key – Maintaining tax-exempt status requires ongoing compliance with IRS regulations. Stay informed about your obligations, such as filing annual information returns (Form 990) and adhering to specific restrictions on political activities and unrelated business income. Failing to file for three consecutive years results in automatic revocation of tax-exempt status.

• Stay Up-to-Date with Changes – Tax laws are ever-changing. Keep a vigilant eye on updates and amendments to the tax code, ensuring that your tax-exempt organization remains in harmony with the latest requirements. The IRS website and publications, such as IRS Publication 557, will help guide you.

• Utilize the Power of Contributions – Remember that tax exemption not only benefits your organization but also encourages others to contribute to your cause. Individuals and businesses are more likely to donate to a tax-exempt organization, as their contributions may be tax-deductible. Charitable contributions help fuel your mission.

FAQs about Section 501(a) Tax Exemption

What's the difference between Section 501(a) and Section 501(c)(3)?

Section 501(a) is the broader Internal Revenue Code provision that grants federal tax-exempt status to various types of non-profit organizations. Section 501(c)(3) specifies the exact requirements for charitable, religious, and educational entities. Section 501(c)(3) is a specific subcategory of tax-exempt group under the umbrella of Section 501(a). While Section 501(a) exempts a qualified organization from paying federal income tax, Section 501(c)(3) also permits donors to claim tax deductions for their contributions.

Do I need an EIN before applying for tax-exempt status?

Yes, an organization is generally required to have an EIN before it can file a tax-exemption application with the IRS. The EIN serves as a unique nine-digit identifier for your organization. You can obtain this number for free directly from the IRS website.

How long does it take to get a determination letter from the IRS?

The timeline for a determination letter depends largely on which application form your organization submits. If you file the streamlined Form 1023-EZ, it usually takes the IRS two to four months to send its decision. For the more comprehensive Form 1023, the processing time is usually three to nine months, though complex applications may take longer.

Can an LLC apply for tax-exempt status under Section 501(a)?

Under IRS guidelines, an LLC can legally seek 501(c)(3) tax-exempt status under Section 501(a), but it faces strict membership conditions. To qualify, every single member of the LLC must be an existing, recognized Section 501(c)(3) tax-exempt organization or a governmental unit. LLCs with individual or non-exempt members cannot be granted this status.

What happens if my organization loses its tax-exempt status?

If an organization loses its tax-exempt status, it is legally required to pay federal corporate income taxes on its net revenue. In addition to the loss of tax-exempt status, donors will no longer be able to deduct the contributions they make to your organization. The IRS will also remove your organization from the publicly available list of recognized tax-exempt entities.

Are donations tax-deductible while my application is pending?

Donations made to your organization while your tax-exempt application is pending can become retroactively tax-deductible. This retroactive deduction is valid if the IRS approves your application and recognizes your exempt status back to your organization's formation date (27-month rule). However, if the application is denied, the contributions made during the pending period aren't tax-deductible.

Does every tax-exempt organization have to file Form 990?

While most tax-exempt non-profit organizations are required to file an annual information return with the IRS, there are exceptions. Churches, their integrated auxiliaries, and conventions or associations of churches are generally exempt from filing Form 990. Additionally, small tax-exempt organizations with gross receipts under a certain threshold typically only need to file an annual electronic notice known as Form 990-N.

Work With Non-Profit Tax Experts

Successfully obtaining tax-exempt status is critical for non-profits and charitable organizations of all missions and sizes. You'll need to select and prepare the right forms and submit them promptly, while maintaining compliance throughout the tax year once you're approved. Keeping your organization's good standing is best with expert support.

Never sweat compliance issues or the risk of losing your tax-exempt status with 1-800Accountant's non-profit tax services. Learn how specialized non-profit setup, bookkeeping, tax prep, and year-round advisory help to ensure your non-profit's status is always in good standing.