Succeeding in Your Business: Registering your nonprofit for tax-exempt status the easy way, Part 1

Cliff EnnicoSeptember 9, 20194 min read

Getting a nonprofit organization off the ground has always involved three steps:

1. Forming a nonstock corporation or limited liability company (LLC) under your state’s business organization laws.
2. Registering the corporation or LLC for tax-exempt status with the Internal Revenue Service under Section 501(c)(3) of the federal tax code.

3. Once federal tax-exempt status has been obtained, registering the corporation or LLC for tax-exempt status under your state’s tax laws.

Until now, the second step was by far the most time-consuming and labor-intensive. First, you had to fill out IRS Form 1023, a monster of a form (for the text, go to www.irs.gov and type “Form 1023” in their search box) that required you to project your financial statements, donations and other information for the first two to three years of your operations, attach all sorts of corporate documents and resolutions as exhibits and describe all of your intended programs in exquisite detail.

Completing the form and pulling together the information required took forever and a day. But then it got worse. Once you filed Form 1023 with the IRS, you had to wait upwards of nine to 12 months to get IRS approval, even if the form was perfectly completed. If you made even one mistake, the IRS kicked it back to you and you started the process all over again. Oh, and did I tell you about the $600 filing fee?

Back in 2014, things got a little easier for nonprofit startups with the IRS’ adoption of new Form 1023-EZ (go to www.irs.gov and type “Form 1023-EZ” in their search box), a streamlined application form that can be filed electronically. If you file it correctly without a single mistake and pay a $275 filing fee by credit card on www.pay.gov, you usually get your approval in 30 to 60 days.

What’s even better, Form 1023-EZ is truly streamlined. It is basically a questionnaire where you provide basic information about your nonprofit’s organizational structure (corporation or LLC), management personnel and charitable purpose. Most of the questions are yes/no, and it’s fairly easy to figure out what the correct answers should be. I timed myself filling out the form for one of my nonprofit clients, and it took all of 15 minutes (of course, I do this sort of work for a living, so give yourself at least a half-hour).

So should your organization file Form 1023-EZ today for you to start pitching rich people for tax-deductible donations? Well, not so fast. As with all things the government gives you, there are a number of conditions, reservations and “wait-a-minutes.”

First of all, not all nonprofit startups qualify to use Form 1023-EZ. The IRS requires you to fill out an eligibility checklist to use the form before you can actually fill it out online. And it has made the checklist very, very hard to find — searching for “Form1023-EZ eligibility checklist” on the IRS website will not get you there. You have to search “Form 1023-EZ” on the IRS website, download the instructions (not the form itself), scroll down the instructions (on the right-hand column) and click on the link for “Form EZ Eligibility Checklist.”

There are 26 questions on the checklist, the most important of which are:

• Do you project that your organization’s annual gross receipts will exceed $50,000 in any of the next three years?

• Have your annual gross receipts exceeded $50,000 in any of the past three years?

• Do you have total assets in excess of $250,000?

• Are you an LLC?

• Are you a successor to a for-profit entity?

• Are you a church, a convention or an association of churches as defined by the Internal Revenue Code?

• Are you a school, college or university as defined by the Internal Revenue Code?

• Are you a hospital, hospital organization, health maintenance organization (HMO) or medical research organization as defined by the Internal Revenue Code?

• Will your organization provide assistance to individuals through credit counseling activities or other consumer credit areas?

• Do you or will you invest 5 percent or more of your total assets in securities or funds that are not publicly traded?

• Do you participate in partnerships in which you share profits and losses with partners other than Section 501(c)(3) organizations?

• Are you a private operating foundation?

• Do you maintain or intend to maintain one or more donor-advised funds?
If you answer yes to any of the 26 questions, you cannot use Form 1023-EZ, although you still may be able to obtain tax-exempt status by filing the full Form 1023, paying the $600 fee and waiting nine to 12 months for approval. If you don’t understand any of the questions or don't know the answer, stop. You will need help from an attorney or tax advisor.

More next week.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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