Neither the Internal Revenue Service nor other agencies of the federal government can interfere with an organization’s ability to solicit donations. However, for the agency not to charge tax on the value of a donation or give the donor a way to take a deduction for it, your entity must satisfy all requirements for tax-exempt status under Internal Revenue Code Sec. 501(c)(3), not section 503(C).
IRC 501(c)(3) Requirements
The tax code allows only specific types of organizations which operate without a profit-related motive to satisfy all requirements of 501(c)(3) and receive tax-exempt status with the IRS. To qualify, an organization must have a charitable, educational, scientific, literary, religious or humanitarian purpose, or coordinate national and international amateur athletic events. However, if a majority of your organization’s activities qualify, the IRS will not approve it tax-exempt status even if there are only minimal profit-seeking activities. The sole mission of the organization can only be for one or more of the nonprofit purposes.
Form 1023 Tax-Exempt Application
Unless your nonprofit is a religious organization or has maximum gross revenue of $5,000 or less, you must prepare an application to receive tax-exempt status under Sec. 501(c)(3) by filing Form 1023. The 1023 form requires you to provide information regarding the activities of your organization so that the IRS can determine whether they qualify for one of the purposes under the tax statute. If the IRS is convinced that your organization qualifies, it will mail you a notice stating its determination. Moreover, if you file the 1023 form by the end of the 27th month following the date you formed the organization, the IRS can apply your tax-exempt status retroactively to the formation date.
Form 990: Tax-Exempt Returns
Once you complete the requirements for tax-exempt status under section 501(c)(3), one benefit is that you can begin receiving donations tax-free, whether it be from fundraisers or independent taxpayer donations. Since the nonprofit is promoting a cause rather than attempting to earn a profit for owners, not having to pay the IRS taxes for a portion of each dollar the organization raises can help ensure the organization will have sufficient funds to pay expenses and to carry out its purpose. However, the IRS still requires your organization to file annual tax returns on Form 990, 990-EZ, 990-PF or the 990-T.
501(c)(3) Donation Benefits
Probably the most beneficial part of having tax-exempt status is that it allows your organization can begin to solicit tax deductible donations from the public. The IRS lets taxpayers claim a deduction for the value of cash and property they donate to organizations that are tax-exempt. Therefore, it is always harder for a non-profit organization to obtain donations if the donor can’t report a deduction for it. For many people, this tax break can significantly affect their decision as to which organization may receive their donation.
Reference: IRC §501(c)