Applying for tax-exempt status from the IRS is both exciting and an anticipatory waiting game. Even if you answer every question on Form 1023 and pay the correct filing fee it can take about 180 days to get a determination letter—the official notification that the organization meets the federal tax exemption as a 501(c)(3) nonprofit.
One of the key reasons entities choose to apply for that coveted tax-exempt 501(c)(3) status in the first place is so that they can offer donors the option to claim a tax deduction on donations. So, what are you supposed to say to donors in that bureaucratic purgatory between incorporation and submitting Form 1023 and waiting for the actual green light go-ahead to say you’re a tax-exempt organization?
The good news is that while your application is pending, the entity can treat itself as exempt from federal income tax back to the date of organization. This would be when the articles of incorporation were filed with the Secretary of State’s office.
That said, there is a big however when it comes to donors. Contributions do not have assured deductibility during this in-between period.
If the applicant entity is eventually granted tax-exempt status, then any donations made during this time period would be tax-deductible for the respective donors. But, if the entity is ultimately not granted federal tax-exemption, then any contributions made during the in-between period will not be tax deductible for the donor.
In the spirit of transparency, the uncertain status of donations (whether they are tax-exempt or not) should be something leaders of organizations should share with donors during this period. If appropriate, organization leaders can indicate that they have every reason to believe the donations in the interim period will be tax-deductible after 501(c)(3) status is achieved, but cannot be guaranteed in the present. Nonprofit pros will also want to indicate they will notify current donors about any status change following the determination letter. It’s also a good idea to implement a gift acceptance policy from the start.
I’m happy to help guide interested nonprofit leaders through the application process and then assist with all of those legal uncertainties and compliance requirements on the way to successful change-making. Don’t hesitate to contact me via email (gordon@gordonfischerlawfirm.com) or phone (515-371-6077), no matter what step along the way you are.
