501(c)3 Tax-Exempt Status: An Overview
What does it mean to be not-for-profit?
Becoming a not-for-profit organization is a form of
incorporation. Organizations that incorporate as not-for-profits exist
for the public good rather than for the financial benefit of an individual
(an owner) or stockholders. The law does not prohibit a not-for-profit
from making a profit; however, all profits must be funneled back into
the management or programming of the organization.
The actual process of incorporation varies from state
to state and takes some time because it requires approval from certain
state agencies. It is a good idea to receive legal advice when considering
any issues of incorporation. If you do not have the benefit of pro bono
legal counsel from a friend or colleague, you may want to contact your
states branch of Volunteer Lawyers
for the Arts (a list of VLA branches is available through CLMP).
What does it mean to be tax-exempt?
Tax-exempt status does not, as many people believe,
automatically follow from incorporating as not-for-profit.
Not all not-for-profits file for tax-exempt status, and the IRS is not
required to grant that status to every organization that applies.
Being tax-exempt is commonly known as having 501(c)3
status because that is the section of the tax code which grants tax
exemption to literary and arts organizations. However, the internal
revenue code has many classifications for not-for-profits; 501(c)3 is
only one of many categories exempt from paying taxes. The rules for
organizations exempt under 501(c)3 are more strict than those governing
other not-for-profits because organizations that receive this status
have the added benefit of being eligible to receive tax deductible contributions.
The primary requirement for receiving 501(c)3 status
is that an organization be both organized and operated towards the pursuit
of certain educational or charitable objectives that benefit the public
as spelled out in section 501(c)3. This requirement of "organized
and operated" is examined by looking at whether an organization's
articles of incorporation address one or more of the objectives supported
by the 501(c)3 code and whether the organization's activities support
that purpose. 501(c)3 organizations have the option of being classified
as either public charities or private foundations, depending upon their
primary sources of financial support. When applying for 501(c)3 status,
it is important to understand the differences between the two categories
to avoid being classified as a private foundation in error.
What are the advantages of becoming not-for-profit,
- Individuals and organizations may make tax-deductible
contributions directly to your organization;
- Your organization becomes eligible to apply directly
for grant support from federal, state and local arts agencies as well
as private foundations;
- You will be eligible to use not-for-profit postal
rates (which are lower than regular rates).
What are the disadvantages?
- You must keep detailed financial records;
- Not-for-profit status requires that your board of
directors (the legal custodian of the organization) hold annual meetings
and take official minutes;
- You will not be able to deduct business related expenses
from your personal taxes;
- The process may cost more effort/time/money than it
is worth. A careful evaluation of your organizations needs and
objectives is recommended before undergoing this process. Talk with
publishers who are both not-for-profit and those who are for-profit;
ask them why they made the choices they did.
If I decide that this is right for my organization,
how do I go about obtaining this status?
Not-for-profit incorporation: Write to the Secretary
of State in your state capital for specific procedures. The degree of
complexity and cost of incorporating varies from state to state.
Tax-exempt status: You must be incorporated as a not-for-profit
organization before applying to the IRS for 501(c)3 status. Your application
will be made by using IRS Form 1023. It may then take as long as 3-6
months for a ruling on your organizations application. If you
are granted federal tax-exempt status, most (but not all) state and
local governments will automatically grant you tax-exempt status, although
filing additional forms may be necessary.
Due to the legal complexities of incorporating an organization
and the stringent requirements required to receive tax-exempt status,
legal counsel is advisable.
Volunteer Lawyers for
the Arts (VLA) is an excellent source of information on this topic.
The national VLA publishes a directory that lists the various state
programs across the country; their general number is 212-319-ARTS. Another
good source is the ART LAW LINE (212) 319-2910, which is staffed by
law student interns trained to answer arts related legal questions.
In addition, the national VLA holds frequent seminars on not-for-profit
incorporation, tax exemption and possible alternatives.
Useful publications include
Publisher Resources |