The process of founding a nonprofit is exciting, and perhaps a bit scary. An important thing for founders to know is that getting 501(c)(3) tax-exempt status takes time. It takes time to research all the requirements. It takes time to gather the appropriate documents. It also takes time to fill out all the proper forms and submit them to the federal government. Then you wait.
How long does it take to get 501(c)(3) status? That depends on several factors. There are steps you can take to make the process more expedient. Most importantly, it’s essential to dot the i’s and cross the t’s. Virtually every line on your application makes a difference in getting your 501(c)(3) status approved.
Following is an overview of the importance of IRS Form 1023, how long the process takes, and how to make a successful application.
Understanding IRS Form 1023
Founding members of nonprofits should familiarize themselves with two IRS forms:
IRS Form 1023 (titled Application for Recognition of Exemption Under 501 of the Internal Revenue Code) is an official IRS tax form that the IRS uses for nonprofits to apply for tax-exempt status. Form 1023 is very important at the start of the process. IRS Form 990 becomes important later on.
Getting back to the question of IRA 501(c)(3) determination processing time, the length of waiting time depends, in part, on which form you file—Form 1023 or Form 1023-EZ.
As the name suggests, Form 1023-EZ is easier to complete, and the rate of approval is very high, but there may be disadvantages to using this form.
The average processing time for Form 1023-EZ is about 2-4 weeks. By contrast, Form 1023 can take between 3 and 6 months for processing, and it could take up to a year.
As you might suspect, Form 1023 is appropriate for large or highly complex organizations and the IRS scrutinizes these applications carefully before sending out a determination letter.
Filing the wrong form or filling out forms incorrectly (intentionally or unintentionally) can cause a lot of legal problems for your nonprofit, so it’s vital to get this stage right. With Form 1023-EZ, nonprofits aren’t required to submit their Articles of Incorporation and they don’t have to submit a business plan.
Also, nonprofits that choose to file Form 1023-EZ may put themselves at a disadvantage when it comes to fundraising. Major donors are often familiar with the difference between Form 1023 and Form 1023-EZ. Some donors are looking for assurance that the nonprofits they support have been thoroughly vetted by the IRS.
Due Diligence in Applying for 501(c)(3) Status
The last thing you want is for the IRS to reject your application. If the IRS 501(c)(3) application processing time is important to you, this isn’t the time for shortcuts. Simply put, be prepared.
Here’s a short list of things you need to do before filling out Form 1023:
- Decide on a name.
- Create your Articles of Incorporation, organizational bylaws, and mission statement.
- Define your programs and activities.
- Create initial financial projections.
- Apply for state tax exemption if it applies in your state.
At this point, you’re ready to start filling out Form 1023 or Form 1023-EZ. Read the directions on the form. You don’t want to miss anything important. Complete all the fields, and if you’re not sure about something, seek expert advice from a nonprofit professional.
Take note that there are different types of 501(c)(3) organizations, each with its own rules and regulations. The IRS considers two main types of 501(c)(3) organizations:
- Charitable organizations
- Private foundations
In the interest of timely application processing, it’s essential to fill out the Form 1023 completely and accurately the first time. You may have to invest a bit more time upfront to get it right, but it’s a key step to avoiding unnecessary delays in getting your determination letter.
How Long Does It Take to Get a 501(c)(3) Determination Letter?
After the IRS reviews your Form 1023 application and any supporting documentation, they will issue a determination letter. The letter stands as official recognition that your 501(c)(3) has tax-exempt status. The letter ensures that your donors will be able to claim their charitable gifts to your nonprofit on their individual or business tax returns.
Also, as a nonprofit, you qualify for a few other benefits like bulk postal discounts, access to grants, and of course, income tax exemption. Many donors refuse to give donations to organizations that haven’t obtained 501(c)(3) status.
As noted earlier, several factors come into play in answering the question, “How long does it take to get a 501(c)(3) status?”
The various factors for the length of time it takes to get your 501(c)(3) status include:
- How well you prepared before completing your application
- Whether you file Form 1023 or 1023-EZ
- Whether your application is complete, and you’ve attached all necessary documentation
Don’t be afraid of asking for help during this process. Other nonprofits will usually offer to help if you ask them. Also, business professionals in your community often serve on other boards, and they’re happy to help as well. As always, the internet offers a wealth of information about nonprofit filings. The IRS website is also quite informative.
The waiting time is a good time to get things organized, hire staff, recruit volunteers, plan fundraising activities, and put processes in place for managing board activities.
Leveraging Digital Technology in Forming a 501(c)(3)
While you’re waiting for your official determination letter, it’s a great time to start exploring the types of digital tools that will support your board’s work. There’s no shortage of digital tools available for board communication, but not all of them are suited for the necessary security that nonprofit board work requires. Rather than register for multiple disparate digital tools, there are lots of advantages to using a board management system like BoardEffect. With a board management system, you have the tools to support your board development cycle, annual cycle, and meeting cycle. Your board members have the benefit of logging into just one system for all their board needs, including creating online board books.
Anything that’s worthwhile takes a bit of time and effort. It takes that and a dose of patience to get your IRS determination letter for a 501(c)(3). Remember, the approval rate is high and lots of organizations complete the process every year. The odds are in your favor.