by Kay Mortimer

Created on: August 17, 2010

The number of nonprofit organizations has grown significantly over the last few decades.  Nonprofits offer a variety of services and can accomplish much good in society.  The U.S. government grants certain tax breaks to nonprofits not applicable to other businesses or individuals.

First of all, once a nonprofit is formed within their state and has obtained a new Federal Employer Identification Number, they must apply to the Internal Revenue Service, in order to obtain special tax code status, such as 501(c)3 status.  The form required to make such requests with the IRS is either a Form 1023 or Form 1024, depending upon the particular tax code the organization requests to apply to them.

Most nonprofit organizations seek 501(c)3 status due to its many benefits.  As a 501(c)3 organization, donors can contribute to your charity and receive tax-deductible credit for their donations.  This allows the individual or business to claim the deduction on their tax return, while allowing your organization to have the funds and be able to use those funds to accomplish its charitable purpose.

All 501(c)3 organizations are nonprofits, but not all nonprofits are 501(c)3 organizations.  This status primarily applies to charitable and religious organizations.  Filing Form 1023 with the IRS is required and you must verify to the IRS the charitable or religious purpose of your organization, along with answering many other pertinent questions. 

One pitfall to avoid with 501(c)3’s is to make certain there is no allowance or actual private benefit inurement to any individual or nonqualified recipient.  This means that your organization must ensure that its funds and assets will be used solely for the charitable or religious purpose of the organization and shall apply to the general public in a nondiscriminatory manner.  Of particular concern is any benefit to any board member, officer, trustee, or other disqualified person within the organization or its leadership.  Nonprofits should make sure that all transactions, especially involving any such individual or business, are conducted in a truly arms-length manner and that appropriate documentation of this is kept as part of its official recordkeeping.

Nonprofits should be run by proper leadership, including a board of directors, and should maintain contemporaneous documents, such as board minutes, etc.  Permanent records should also be kept, which includes the organization’s

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