501(c) Nonprofit Organization
Being a registered 501(c)(3) nonprofit means donations to your group are tax-deductible. It also makes you eligible to apply for federal grants. And many businesses will only donate to organizations that have 501(c)(3) status because of the tax deductibility issue.
Technically, your group could exist under the umbrella of the a school.
To obtain tax-exempt status under section 501(c)(3) of the Internal Revenue Code, your group will need to fill out IRS Form 1023, the Application for Recognition of Exemption. Yes, it’s long—25-plus pages—and it will take one or two officers a few hours to complete. But if you have all your records organized, it’s a pretty straightforward process. Information also can be found on the Internal Revenue Service website
There’s also a one-time application fee of $300 or $850, depending on your group’s yearly revenue. (If your group’s gross annual receipts have exceeded or will exceed an average of $10,000 annually over a four-year period, the fee is $850. If they will not exceed $10,000 over that period, the fee is $300.)
The approval process usually takes six to eight weeks. When your application is accepted, the IRS sends you official proof of 501(c)(3) status, called a “determination letter.” Be sure to make copies for your records and to have them on hand in case donors need one.
IRS Cuts 501(c)(3) Paperwork
Effective Sept. 9, 2008, new groups applying for tax-exempt status will no longer have to file Form 8734.
New IRS rules have reduced the paperwork PTOs must file to become a registered 501(c)(3) charity. According to the revised rules, a new 501(c)(3), such as a typical PTO, will be classified as a publicly supported charity if it expects to have public support at the time it applies for tax-exempt status. As a result of the change, effective Sept. 9, 2008, an organization is no longer required to file Form 8734 at the end of its first five tax years.
Under the old regulations, an organization that wanted to be recognized by the IRS as a publicly supported charity instead of a private foundation had to go through an extended two-step process. First, the organization had to declare on its application that it expected to be publicly supported on an ongoing basis. Then, after five years, it had to file Form 8734 showing the IRS that it actually met the public support test. If it didn’t meet the test, it would be designated a tax-exempt private foundation and its financial transactions would be subject to stricter rules.
If you have any questions about how this ruling affects your group, go to www.irs.gov/charities.