Applying for Tax Exempt Status - Why, What, and How

12.22.2016 Written by Michael 'Gabo' Gabovitch

As the end of the year approaches and you make your end of the year charitable contributions, did you ever wonder how charities are approved by the Internal Revenue Service?

Applying for tax exempt status – Why, What, and How

Why you would want to create a charitable entity?
You have an idea on how to help others make the world a better place.

Why the government provides tax incentives to charities and benefits to their donors?
Charities do work that would otherwise impose burdens on state and local government.

What are the “tax” benefits?

  • Tax exempt organizations do not pay taxes on income related to their charitable purpose.
  • Charitable contributions from donors to qualified tax-exempt entities (under Internal Revenue Code Section 501(c)(3)) are tax deductible for Federal income tax purposes.

How entities obtain 501(c)(3) status?

  • Nonprofit entities are created under state law, but do NOT automatically qualify as tax exempt organizations, which means they may NOT be qualified to receive tax deductible donations.
  • Section 501(c)(3) tax-exemption entities must be organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for testing for public safety, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
  • Applicants must complete and file an Application for Recognition of Exemption (IRS Form 1023) with the IRS.
  • While it is important to answer all the required questions on Form 1023, it is equally important to tell your organization’s story and explain why your entity should qualify for exempt status.

The above is a limited summary of certain concepts and is not intended as legal guidance or advice.

Michael Kerschner is a shareholder of Katz Korin Cunningham PC, whose practice includes assisting clients with forming and applying for tax exempt status.

Any tax advice contained in this communication is not intended or written to be used, and cannot be used, to (1) avoiding penalties under the Internal Revenue Code or governed by other applicable taxing authorities, or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.