If you’re considering 501(c)(3) status, it likely means you’ve felt a calling to give back. Perhaps you’re forming a private foundation or public charity, or maybe this article is the first step in your non-profit journey. Wherever you are in the process, understanding the 501(c)(3) tax exemption is essential to helping your organization achieve its mission. This blog post provides a clear overview of the 501(c)(3) process, from getting started to maintaining compliance over time.

1. What Does It Mean to Have 501(c)(3) Status and Who Qualifies?

An IRS determination letter approving 501(c)(3) status officially acknowledges your organization as a tax-exempt nonprofit. This designation exempts your organization from paying income tax on revenue generated from mission-related activities and allows donors to make tax-deductible contributions. Together, these benefits enhance your organization’s fundraising capacity and strengthen its credibility with the community and prospective partners.

To qualify, your organization must operate exclusively for IRS-approved purposes, including:

• Religious
• Charitable
• Scientific
• Educational

2. Establishing Your Organization

Next, your organization will need to establish a board of directors to meet IRS and state regulatory requirements. The board serves as the organization’s governing body, responsible for oversight and strategic direction. The IRS generally expects a minimum of three individuals to serve on the board. While board members are required to meet at least once annually, best practices recommend quarterly meetings.

With your board of directors established and organizational documents finalized, the next step is to obtain federal and state tax identification numbers. These IDs are necessary for opening bank accounts, reporting sales and employment taxes, fulfilling other tax filing requirements, and completing your application for tax-exempt status.

Once you’ve completed these steps, you can proceed with applying for tax-exempt status using IRS Form 1023 or 1023-EZ. While your application is under review, it’s important to let potential donors know that your 501(c)(3) status is currently pending.

3. Filing for 501(c)(3) Status: Form 1023 and 1023-EZ

After forming your non-profit, the next critical step is applying for the 501(c)(3) tax-exempt status. You can submit either Form 1023 or the streamlined Form 1023-EZ.

Selecting the Appropriate Form

• Form 1023: This application is intended for organizations that are not eligible to use the IRS 1023-EZ form, as determined by the criteria in the 1023-EZ Eligibility Worksheet. It requires additional documentation, including financial statements and detailed narratives.
  Form 1023-EZ: A simplified version of Form 1023. These organizations typically have average annual gross receipts under $50,000 and total assets under $250,000.

Preparing for the Application

Before filing, gather:

• Organizational Documents: Articles of Incorporation and Bylaws.
• Financial Information: Budgets and projections.
• Organizational Narrative: A concise description of your mission, programs, and activities aligned with 501(c)(3) purposes.

Application Submission and Processing

Both forms are submitted electronically through the IRS’s Pay.gov portal. Application fees (nonrefundable)* are:

• Form 1023: $600
• Form 1023-EZ: $275

*Pricing as of 8-19-25.

Processing times vary:

• Form 1023-EZ: Typically, three to twelve weeks, or if application selected for a detailed review 120 days or more.
• Form 1023: Three to six months, but a timeline of 9 to 12 months is not uncommon. In rare cases expedited processing is available. Expedited processing would require a compelling reason such as a pending grant that is time-sensitive or providing disaster relief.

CDS supports you through documentation, submission, and any IRS inquiries, helping increase the likelihood of a smooth approval.

4. Maintaining Compliance After Receiving Your Determination Letter

Receiving your 501(c)(3) determination letter is a major milestone, but maintaining compliance is an ongoing responsibility.

Appeals

If your application is denied, you may submit a formal appeal within 30 days of the denial notice. This involves addressing the reasons for denial and providing additional supporting information.

Ongoing Compliance Requirements

• Political Campaign Activities: Prohibited. Violations can result in revocation of tax-exempt status and penalties.
• Lobbying Activities: Must not be a substantial part of your activities.
• Private Benefit: Earnings cannot benefit private individuals or shareholders.
• Unrelated Business Income: May be taxed if substantial.

Annual Reporting

File your exempt organization’s annual tax returns (Form 990) and any required state reports to disclose your activities, governance, and financial information. CDS can help ensure these filings are completed accurately and timely.

Other Compliance Requirements

• For employees, W-2 forms must be issued annually.
• Affordable Care Act reporting for employee health coverage.
• Workers’ Compensation insurance.
• Donor acknowledgments for contributions over $250.

Maintaining 501(c)(3) status involves careful attention, but with professional guidance from CDS, your organization can focus on its mission.

5. Minnesota Requirements for Local Non-profits

For Minnesota-based non-profits, here are a few additional state-level requirements to be aware of.

• State Sales Tax Exemption: Submit Form ST16 to the Minnesota Department of Revenue. Approval is not automatic.
• Board Composition: A minimum of three directors is required under state law.
• Annual Reporting: If incorporated, or organized as an LLC, you must file an annual renewal with the Minnesota Secretary of State to maintain your organization’s good standing. Additionally, based on your organization’s activities and circumstances, registration with the Minnesota Attorney General’s Office as a “soliciting charity” or “charitable trust” may also be required.

Conclusion: Staying Compliant and Focused on Your Mission

Achieving 501(c)(3) status is an important step toward advancing your organization’s mission. From forming your non-profit to filing with the IRS and maintaining ongoing compliance, professional guidance can simplify the process and reduce risk. With careful planning and support from our experts at CDS your organization can remain compliant while focusing on its goals and making a meaningful impact. Give one of our experts, Meranda Wacek or Mitch HJelle, a call at (888) 388-1040.

Meranda Wacek, CPA and Manager comments, 

“A strong mission is your best asset, 501(c)(3) status is the helpful tool for sharing that mission with the world.”