Forming a new nonprofit other than a Section 501(c)(3) public charity or private foundation? Submitting the right tax-exemption application is critically important! More specifically, organizations other than public charities or private foundations need to file IRS Form 1024 or 1024-A, and now electronically, in order to obtain IRS determination letters.
Which IRS Form? Which Type of Tax-Exempt Entity?
Unless an organization is expressly exempted,[1] it should file an IRS application for recognition of tax-exempt status. Public charities and private foundations seek recognition of Section 501(c)(3) status by filing IRS Form 1023 (or IRS Form 1023-EZ, its streamlined counterpart).[2] Certain other types of nonprofit organizations, including trade associations organized under Section 501(c)(6) of the Tax Code, social clubs organized under Section 501(c)(7),[3] fraternal beneficiary societies (per Sections 501(c)(8) and (c)(10)), and title holding corporations (per Section 501(c)(2)), must file through IRS Form 1024. Social welfare organizations may obtain a determination letter recognizing their 501(c)(4) status through IRS Form 1024-A.[4]
Each type of nonprofit organization has unique requirements for qualifying for tax exemption, with corresponding provision of information obligations. Applicants thus should ensure they are filing under the proper Tax Code section, responsive to such tax-exempt requirements, and particularly with respect to their corporate “purpose” language in their articles of incorporation.[5] Although engaging an attorney to complete Form 1024 or 1024-A is not necessarily required, doing so may be beneficial to ensure the application presents information best situated for IRS approval, without further steps to provide additional information to the IRS or unwanted delay.
Key Questions, Right Answers
For both Form 1024 and 1024-A, the application consists of the following parts.[6]
Part I
Identification of Applicant—this Part requests general corporation and contact information, including EIN, fiscal year end, and the name, mailing address, and title of officers, directors, and other corporate officers.
Part II
Organizational Structure—this Part requires the applicant to state whether it is a corporation, limited liability company, unincorporated association, or trust. Applicants should also provide a copy of the organizing document and formation date and include this document with other supplemental materials in a single PDF (see below for more information).
Part III
Activities—this Part requests that the applicant describes the activities of the organization, past, present, and planned. In order to grant tax-exempt recognition, the IRS must evaluate the specific activities the organization undertakes to accomplish its exempt purpose(s). Sufficient and explicit detail about the organization’s activities here can help show the IRS what the organization’s exempt purpose(s) are and how it will achieve them. This narrative can also be included in the Supplemental Responses (see below).
Part IV
Compensation and Other Financial Arrangements—this Part probes for conflicts of interest or other financial structure that may disqualify an organization from obtaining tax-exempt status, particularly in the areas of compensation, contracts, director/officer personal benefit, or joint ventures structure. Depending on answers to these questions, the applicant may need to provide further information.
Part V
Financial Data—this Part asks for a statement of revenues and expenses and balance sheet. The specific financial information required depends on how long the organization has been operating (consult the instructions for specifics).
Part VI
Reinstatement After Automatic Revocation— this Part addresses whether the organization is applying for reinstatement of exemption after its exemption status was automatically revoked.
Part VII
Annual Filing Requirements—this Part declares whether the organization falls under a specific exception to be excused from filing annual information returns (Form 990, 990-EZ, or 990-N).
Part VIII
Signature—this Part is seemingly very simple, but make sure the person signing is listed as an officer, director, or trustee under Part I.
Additional Qualifying Materials
In addition to the application itself, applicants should prepare and upload a single, PDF file that includes the organizing documents (such as articles of incorporation) and any amendments, as well as a copy of bylaws, if adopted. Applicants can also include the following: IRS-Form 2848, Power of Attorney; Form 8821, Tax Information Authorization; supplemental responses; or an expedited handling request if applicable, but these documents are not required.
Supplemental Responses (Should) Tell the Story
Though it is technically not required, providing supplemental responses gives an applicant the opportunity to explain how and why it should qualify for tax-exemption under the section it is claiming. The information included in supplemental responses should answer the following questions:
1. What are the applicant’s activities?
2. Who conducts these activities?
3. Where do the activities take place?
4. What is the approximate percentage of time devoted to each activity?
5. What is the approximated percentage of resources spent on each activity?
6. How is each activity funded (e.g., donations, fees, grant or government funds, etc.)?
7. How does the activity further the applicant’s exempt purposes?
The supplemental responses provide an opportunity to further describe the organization, its activities, the people it helps, how it complies with requirements for tax exemption and, therefore, qualifies for tax-exempt recognition. With flexibility to describe the organization outside the rigidity of the application’s questions, supplemental responses are a great way to explain the nonprofit’s identity and future direction.
Lasting Importance
If a nonprofit is approved for tax-exemption after filing its application, the resulting IRS determination letter will become a vital document for the organization’s success. Leaders should carefully review the determination letter for the effective date, the correct tax-exempt subclassification, any required IRS Form 990 filings, and related tax compliance.
Public Disclosure
If an organization’s tax-exempt status is approved, it must make the following information available for public inspection:
- Complete Form 1024 (or Form 1024-A) and any supporting documents;
- Form 2848, Power of Attorney, and all other correspondence between the nonprofit and the IRS regarding Form 1024;
- Determination letter; and
- Annual information returns, excluding identifying information about contributors.
Filing Form 1024 or 1024-A can seem like a daunting task, especially with the lasting effect approval and proper classification have on a tax-exempt organization. However, with careful attention, the process can be completed and result in proper tax-exempt recognition for nonprofit organizations.
Completing the application well can provides other benefits for a nonprofit too, such as ensuring that it establishes a well-defined purpose statement, articulates its current and future activities, and raises its profile with potential supporters and other participants. The IRS Form 1024 and 1024-A thus provide a springboard for maximizing the nonprofit’s organizational and operational success!
[1] Houses of worship, integrated auxiliaries, and certain other religious organizations are not required to affirmatively seek tax-exempt recognition from the IRS. They may nevertheless choose to do so, however, such as for public recognition of tax-exempt status, easier ability to address state tax exemption aspects, and to fulfill R-1 visa requirements (as may be sought).
[2] For more information about IRS Form 1023 requirements, please see our blog article here.
[3] For more information about social clubs, please see our blog article here.
[4] Note that Section 501(c)(4) organizations are required to file an IRS Form 8976 “Notice of Intent to Operate,” within 60 days of incorporation.
[5] For more information about corporate purpose statements, please see several blog articles through W&O’s website here.
[6] Note, additional schedules to the tax-exemption application may be required, depending on the organization.
