Do All Charities Need 501(c)(3) Status?

CloudLancer Writing Services is approached almost on a daily basis with inquiries regarding whether a charitable organization has to have 501(c)(3) status. The answer depends on your goals for your charitable activities.

Technically, the answer is "No" for some organizations. The Internal Revenue Service, in the Instructions for Form 1023, defines organizations that do not have to obtain 501(c)(3) status. This includes churches (including synagogues, temples and mosques) and integrated auxiliaries of same; and organizations receiving less than $5,000 in gross receipts annually.(Italics added by author)  However, and also noted in that publication,  if your organization accepts donations and the donors want to claim them on their taxes, you would need to be defined as a 501(c)(3) even if your organization is otherwise exempt from the requirement, to allow them to claim that deduction.

In reality, few organizations can achieve their charitable goals with receipts less than $5000
annually. In addition, IRS rules prohibit foundations and most donors from receiving public money obtained on a tax-exempt basis and then disbursing it as a grant to a non-qualified charity.  Thus, at the point you need more than $5,000 annually to stay in operation, you are looking at applying for tax-exempt status.  

My general advice to any charity seeking grant support or increasing their annual receipts above $5K, is that you DO need to go through the process and expense of obtaining your tax-exempt status.

The cost will vary according to the business form under which you elect to operate (corporation, LLC, association, etc) since filing and registration fees vary by state.  If you plan to solicit funds in more than one state, you may have to register in each state as a fundraising organization to do so. Most states have a fee for that as well. The fee to file the 1023 application has just been increased to $400 for organizations with gross receipts under $10,000 annually over a 4-year period, and $850 for organizations above that amount annually over a 4-year period.  There may also be preparer fees, if you choose to use a contracted preparer, as well as possibly legal fees if you have an attorney review your by-laws for compliance with state and Federal requirements.

The 1023 also now includes a requirement for a projection or reporting of income.  In the past, many non-profits simply stated that their gross receipts would not exceed $5,000 annually.  Now, you must actually provide data to support that claim. If you have been operating for less than five years you can use accepted financial information (tax returns,  financial statements or other acceptable records) covering the most recent three years, or four years of financial information if you have completed one tax year. You can also provide an estimate (a pro forma statement) of your anticipated income.  (See IRS Notice 1382, Changes for Form 1023 for the full text). Note that if your mission vs. income is not believable, the IRS is going to make the observation that your income estimate may be too low to achieve the stated goals, and request more accurate information before granting your 501(c)(3) letter of determination.