The Next Step for the Not-for-Profit
by Dena Simone Moss, Esq.
Forming a not-for-profit corporation does not automatically give you tax-exempt status. The decision to go not-for-profit is only the first step. Next is your application to the Federal Internal Revenue Service (entitled "Form 1023") for recognition of your tax-exempt status under Section 501 (c)(3). If you application is approved, the IRS will issue a tax-exempt letter and you can begin fund-raising and soliciting contributions. Without the tax-exempt letter, you cannot advertise or imply that donors may deduct their contributions on their income tax returns. So, if you expect to apply for funding or ask for donations, you should complete Department of the Treasure Internal Revenue Service Form 1023.
Uh-oh! Does Form 1023 look like
a tax return?
It does. Same author.
Nevertheless, this is one form that you should at least try to do yourself. You can always consult your attorney or your professional fundraiser, but you will be the primary (and ultimate) source of the information the form asks for. Review the form first, and complete it as best you can. You will be surprised at how much of it you can do without professional help.
Check the website, www.irs.gov, for forms and instructions. You can download all forms and instruction booklets. Or use the "IRS Exempt Organizations Customer Account Services" (1 877 829 5500) and request forms and instructions. Although the customer service representative can answer specific questions, don't depend on him or her to help you fill in the whole application, no matter how much more user-friendly the IRS claims to be.
Form 1023 is a daunting twelve-page questionnaire, not including the extra schedules and exhibits. Pay attention to the little warning box on the upper right hand corner: "If exempt status is approved, this application will be open for public inspection." In other words, your application and all the attachments will become a public record. So be accurate and honest.
Can I really do this myself?
You should try, because you have the information. All you need to do is organize it.
First, read the application through and gather the information you will need to provide. Have your certificate of
incorporation and Federal employer
identification number (EIN) in front of you. Make a list of your highest-paid ($ 50,000.00 or more per year) employees, independent contractors, and Board members, along with their addresses. If there aren't any, say
so. You should have information about the existing business as well, if
you are shifting your business
operation to a newly-formed not-for-profit corporation.
Part IX asks for financial data, either past history or future projections. You'll be tempted to speak to your accountant or financial adviser, who will be tempted to charge for her time. But the questionnaire is so specific, you should feel comfortable doing it yourself, at least as a "first pass" and minimize the time your expert will have to spend. Look at a copy of last year's Federal tax return for information about your existing business. Your old tax return will also help you make projections,
that is, educated guesses, about the expenses of your newly-formed not-for-profit corporation.
Be literal.
Don't overthink the form. Most of it is pretty straight forward, but parts can be confusing. Part X, for example, seems to require that you ask for either an "advance" ruling or a "definitive" ruling. But that only applies if you expect to receive a "substantial" part, specifically more than one-third, of your "financial support" from donations, grants, or government sources. Think it through: will the source or sources of your income significantly change during the first few years of your not-for-profit corporation's lifetime? While you may receive some funding and more donations, isn't it likely that the greatest proportion of your "financial support" will still be tuition and fees for classes and tickets for performances? Therefore, you probably will not have to ask for a ruling, either "advance" or "definitive."
Form 1023 has a checklist. Follow it. To the letter. Don't give the IRS an opportunity to delay your approval or deny it, simply because you didn't complete the application.
Tax-exempt status is a privilege,
not a right.
Remember, if your application for tax-exempt status is approved, you will be getting public support, not only through donations, grants, and other types of funding, but also, and more important, through the foregoing of tax-revenue. How you complete
Form 1023 will determine whether your business will be deemed to justify that support.