Regardless of the honorable, charitable intentions of nonprofits, the heart of the matter still comes down to business: funding, budgets, and taxes.
Introduced by the IRS in July 2014, Form 1023-EZ is designed to alleviate tax-induced headaches for nonprofits seeking tax exemption, or 501c3 status, by eliminating lengthy paperwork—from 31 pages to three—and reducing processing delays. Form 1023-EZ also costs less to file at $400 versus $850 for the traditional 1023 application.
“Any organization that wants to apply [for tax-exempt status] should look into Form 1023-EZ,” says Sean Cook, tax attorney and partner with Warner Norcross & Judd, LLP.
The IRS estimates as many as 70 percent of applicants will qualify to use the new streamlined approach; a required 26-question eligibility worksheet found at www.IRS.gov clarifies the revenue and structural requirements necessary.
For nonprofits interested in Form 1023-EZ, “Reviewing the eligibility questions will make the process easier,” Cook says, “and also educate them on the different issues that may come up down the road.”
To be recognized as a 501c3 non-profit organization with tax exemption might seem like the right way to go, especially with the new Form 1023-EZ reducing the paperwork and time necessary to complete the process.
However, Sean Cook, tax attorney and partner with Warner Norcross & Judd, LLP, points out that there are both pros and cons when it comes to tax-exempt status—and offers tips for organizations seeking 501c3 status.
Pay Less in Taxes. Recognized 501c3 organizations are not required to pay tax on tax-exempted income.
Fundraising Ease. Donors and/or contributors are able to take a tax deduction on their personal tax returns for their contributions.
Annual Reports. Non-profit organizations are required to file Form 990s annually post-exemption. Note: A nonprofit that quickly files the 1023-EZ without proper organization and structural planning could face issues when it comes time to provide its annual reporting, ultimately endangering its status.
Rules and Regulations. 501c3 organizations are held to hardline rules regarding the usage of tax exempt funds.
Understand Your Budget. Cook says he’s heard “We plan to spend as much as we earn,” from many nonprofits that unfortunately misunderstand the need to provide the IRS with hard numbers and budget plans for the organization.
Know Your Mission. Whether income is declared exempt from tax (or not) could depend on an organization’s clearly defined mission (or lack of one).
Seek Professional Support. Cook says there are numerous, worthwhile reasons and multiple ways tax attorneys assist both the filing and maintenance of tax-exempt status.