For charities and other nonprofit organizations to become exempt from federal income taxes, the Internal Revenue Service has a formal Application for Recognition of Exemption, also known as Federal Form 1023. This process results in an organization obtaining 501(c)(3) status, which must be approved for a charity or nonprofit organization to be legally exempt from federal taxation. Once the IRS processes and approves the application, a determination letter is sent to the organization. The determination letter outlines the organization's tax-exempt status and allows organizations to receive tax-deductible charitable donations.
The Application for Recognition of Exemption is rather lengthy and can be complicated, so it's best to begin completing the application with a pencil. This way you can make corrections as needed. Form 1023 contains four parts, and you will be required to submit supporting documentation and supplemental IRS forms. The first section is easy and straightforward. Provide general information, such as the organization's name and contact information.
In this section, you need to provide information about the organization's activities. In essence, it's an outline of the organization's purpose, the structure of the organization, current plans, future plans and fundraising activities. The form may not allow enough space, so attach additional sheets of paper, if necessary. This section is the most important because the IRS uses the information about the organization to determine if it qualifies for 501(c)(3) status.
You may need professional assistance to complete part three because it asks for tax-related information, specifically how the organization will be financially supported. You will need to provide documentation to support financial assertions. An accountant or tax professional may be beneficial when completing the part of the application.
The last section of the application requires you to provide a current organizational budget and a budget for the following two years. It is similar to constructing a business plan. You'll also need to attach Articles of Incorporation and Bylaws for the organization.