Acting and Thinking As a Nonprofit Organization

Let's say your group decides to incorporate as a state nonprofit and to apply for a federal tax exemption as a 501(c)(3) or a 501(c)(4) organization. The process for federal recognition is designed to take months as organizations slowly build the necessary community support, learn to function as a viable business, and get their internal affairs in order so they can prepare a successful application.

The Twenty-Seven-Month Rule

You can incorporate as soon as your organizational documents are ready and you identify the board of directors, which can happen soon after your initial meeting. However, there is a built-in window of twenty-seven months from the time you incorporate until you need to file your IRS Form 1023, the application for tax-exempt status. During this period, your organization should take form, both internally and within your community. Use the time to identify potential contributors and establish all programs and outreach elements. Start getting media coverage, establishing various committees, and operating as a fully functioning corporation. Before you receive federal recognition, you will be liable for any federal corporate taxes if you generate a level of income requiring it.

Plan to Use This Time Wisely

The time between your formal incorporation and application for tax-exempt status is designed to allow your organization to come into its own. Acquaint your community or service area with your planned work and answer any questions they have. Use this time to gear up to your full potential; don't hold off on your operations until you apply for a tax exemption. Make use of the people who gathered for your initial meeting. You can generate media coverage, contact major sponsors, and do everything a nonprofit would do.

May we accept contributions before we have our federal tax-exempt status?

Of course! However, you must let all contributors know that although you are applying for tax-exempt status, you do not currently have it. Contributors may take the deduction retroactively to your incorporation date. Until you receive that determination letter, you do not have tax exemption, you may not imply that you do, and you may not suggest that contributors deduct donations on their next tax return.

Your corporate tax exemption will be retroactive to the time of your formal incorporation, but during the window between incorporation and the receipt of your determination letter granting tax-exempt status, you may be responsible for federal taxes. You may want to seek the advice of a tax professional to determine how best to proceed in your unique situation.

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