Page 73 - Washington Nonprofit Handbook 2018 Edition

PART 4. OBTAINING RECOGNITION AS A CODE SECTION 501(C)(3)
ORGANIZATION

CHAPTER 22. Considerations in Determining Whether (and When) to Seek
Code Section 501(c)(3) Status

Obtaining recognition as an organization exempt from federal income taxes
under section 501(c)(3) of the Internal Revenue Code of 1986, as amended (also
referred to as the “section 501(c)(3);” organizations exempt from federal taxes
under Code section 501(c)(3) also referred to as a “501(c)(3) organization”) requires
(1) forming a nonprofit corporation or other suitable nonprofit entity under the law
of a state, and then (2) completing and filing IRS Form 1023 or IRS Form 1023EZ.
This Part describes the preparation of Form 1023 or IRS Form 1023EZ. See
Chapter 23 Applying with the Form 1023EZ, for more information on the Form
1023EZ.

Federal tax-exempt status under section 501(c)(3) provides advantages
including (1) tax benefits for some contributors to the organizations, (2) eligibility
for private foundation grants, and (3) an exemption from the federal corporate
income tax on most net income. However, to obtain this tax-exempt status, an
organization must operate in compliance with certain restrictions: (1) its purpose
must be charitable, (2) it cannot provide financial benefits to private individuals,
(3) it cannot promote or oppose candidates for public office, and (4) its lobbying
activities are restricted. Before deciding to proceed with an application for 501(c)(3)
status, it is worth considering whether the advantages of this status are important
to achieving the organization’s goals, and whether the restrictions would materially
impede the organization’s ability to accomplish its goals. Also, it is worth
considering whether the organization will meet the criteria necessary to qualify as a

public charity and, if not, what the effect would be of needing to comply with the
more restrictive rules applicable to private foundations.

a. Why Seek Code Section 501(c)(3) Status

A 501(c)(3) organization enjoys a variety of tax-related and other benefits.

(i) Individual and Gift and Estate Tax Deduction

One of the biggest advantages of being a 501(c)(3) organization is that the
organization may receive contributions that also benefit the donor—in fact,
501(c)(3) organizations are the only organizations to which people can make tax-
deductible charitable contributions. A donor who contributes to a 501(c)(3)

WASHINGTON NONPROFIT HANDBOOK -62- 2018