What are 501c3 Determination Letters and 5 Steps to Get One

Achieving your nonprofit’s 501(c)(3) designation opens up many crucial doors. While there are some common, avoidable mistakes when preparing to apply for a 501(c)(3) determination letter, a little planning will help pave a smoother path.

This classification as an official nonprofit helps you accomplish more for your mission with even greater efficiency. Learn more about how to prepare for a favorable 501(c)(3) determination letter with our simple five steps outlined below.

The United States Internal Revenue Service (IRS) issues a 501(c)(3) determination letter for approved nonprofit organizations operating within the country. This letter lends legitimacy to your unique and special mission and opens the door to grants, tax savings, and other unique benefits.

Nonprofits that earn the title of 501(c)(3) may include a wide variety of philanthropic areas of focus including the arts, healthcare, and education. In 2016, almost 1.1 million organizations were considered public, 501(c)(3) nonprofits.

Applying for a 501(c)(3) determination letter usually carries a fee. For organizations with more than $50,000 in assets, the fee averages around $275. If you earn more than $50,000 in annual earnings, it may cost around $600 to file the IRS Form 1023, or Application for Recognition of Exemption.

Approved nonprofits receive a physical letter in the mail that must be retained. A 501(c)(3) determination letter example can be found online if you have forgotten what this document looks like.

If you receive an approved letter from the IRS, you should store this with your articles of incorporation or other founding documents of the organization. A copy of this letter is often requested to be included with grant applications, so be sure it is easy to locate.

A 501(c)(3) determination letter allows your nonprofit to function at its highest capacity. Many doors will remain closed to your organization if you do not seek this important designation for your nonprofit.

There are several important reasons to follow the procedure to gain your federal tax-exempt status. Let’s take a closer look:

When you achieve the 501(c)(3) determination letter, your nonprofit is now eligible to avoid federal income tax. This means a higher proportion of every donation goes directly to your mission.

Skipping this important step results in skimming a large percentage of every donation and redirecting it to the federal government. Donors may pass over your nonprofit in favor of one which can direct a higher percentage of every donation to mission-related needs.

Apply for Grants

Once you have your 501(c)(3) status, your nonprofit is now eligible to apply for a huge assortment of grants. Most grants require this certification as a basic eligibility requirement to apply for funding.

Grants provide an essential, diversified source of revenue for any organization. Many grants support narrow funding areas that may align perfectly with your mission.

Grant funds can transform an organization. Not only is the funding important, but the partnership with funders and foundations provides crucial networking for and awareness of your cause.

Most donors want to give their hard-earned money to vetted charitable organizations. A 501(c)(3) designation helps establish trust in your nonprofit and provides credibility for how you will invest their donations. Without this status, a donor may think your nonprofit is not official.

Without this distinction, your nonprofit also cannot offer tax write-offs for its donors. Only once you receive your letter can all donors claim their philanthropic contributions on their annual tax returns.

Earn Discounts

A 501(c)(3) designation opens the door to exclusive nonprofit discounts for your organization. One of the most significant discounts is on USPS postage rates. As most nonprofits complete large-scale mailings for annual appeals or newsletters, this is a large saving.

Many corporations and services extend nonprofit discounts to organizations that can prove their charitable status. Enjoy discounts for software and technology products, magazine subscriptions, professional memberships or conferences, and much more.

Wondering how long it takes to achieve your 501(c)(3) determination letter?

It can take between three to five months for the IRS to respond to your application. By following the steps below, you can help the process move as smoothly as possible. Read on to learn more about the important details the federal government will scrutinize.

Follow these directions closely to expedite this important and lengthy process.

1. Name Your Nonprofit

All charities hopeful to achieve their 501(c)(3) status must acquire an appropriate name that helps them stand out. No organization can hold the same name as another registered charity.

Each state holds a list of restricted and outlawed names that applies to both for-profit and nonprofit organizations, like this list from California's Secretary of State. Most states frown upon organizations using words that do not apply to their business, like bank, city, LLC, CPA, college, museum, and insurance.

In addition to the legal considerations, your nonprofit’s name must do a lot of heavy lifting. Choose a moniker that clearly communicates your mission and is memorable to potential donors, volunteers, and advocates.

2. File Articles of Incorporation

Like any business, a charity must officially register to announce its founding. These founding documents are called the articles of incorporation. Most nonprofits must register with their state to establish their formal creation.

Articles of incorporation include the official name of your corporation and the names and addresses of all initial board members. The incorporator, or founder, must list their name and address, as well as sign the document.

Many states also require a description of the corporation’s purpose. This can be specific, like your mission statement, or kept very broad.

Keep in mind there may be a fee associated with filing your articles of incorporation. These fees may vary but average between $50 to $100. Check to see if you can file these documents online or if they must be filed in person.

As the articles of incorporation show, a board of directors is one of the first and most essential steps to founding a nonprofit.

At least one individual must identify as a board member of your nonprofit and freely submit their personal information.

The role of the initial board of directors may change, but these volunteers must understand their responsibilities. These directors will advise and oversee the beginning stages of the nonprofit, as well as the hiring and firing of key executive staff members.

As your organization grows, the makeup of your board will change. Your board should include finance and legal experts, as well as individuals with strong connections to the community and influential donors. To start, a small, dedicated group is all that is needed.

A nonprofit organization’s bylaws provide the administrative structure for the entire organization. Everything from term limits for board members to the official mission statement and instructions on how to dissolve the nonprofit live within the bylaws.

Bylaws construct the essential boundaries of an organization’s operations. Like the United States Constitution, a nonprofit’s bylaws must be strictly followed. Amendments are allowed as the organization grows and changes.

Many nonprofits choose to consult a lawyer as they draft their bylaws. Because these ideas will govern your organization, it is helpful to have an expert look them over to make sure they are legal and appropriate to serve as a foundation for your mission.

In addition to bylaws, other official documentation must be organized before writing the application for your 501(c)(3) determination letter, like an official list of your board of directors with their names and contact information. Following your newly-written bylaws, elect officers to your board like a President, Vice President, Secretary, and Treasurer.

Empower your board secretary to maintain official notes of all board meetings and pertinent committee meetings, like the Finance Committee, Governance Committee and Executive Committee.

5. Acquire a State Tax Identification Number

Even though your 501(c)(3) status exempts you from taxes, it is still necessary to have a state tax identification number in most of the United States. This number helps further lend legitimacy to your organization, showing you as an independent, tax-paying entity.

Explore your state’s Secretary of State website to understand the specific regulations for your location. This is the final step before you can file your Application for Recognition of Exemption with the IRS. Once you have finished all of these steps, you are prepared to submit your Application for Recognition of Exemption in hopes of receiving an approved 501(c)(3) determination letter.

Does my nonprofit need a 501(c)(3) determination letter? Here’s the truth: almost always the answer to this question is yes!

Applying for a 501(c)(3) determination letter involves establishing the essential framework of your organization. Receiving an approved letter opens the door to crucial grant funding, helpful discounts, and the legitimacy donors are looking for when determining their philanthropic investments.

While this process may sound overwhelming, taking the time to gather effective articles of incorporation, bylaws, board governance, and other critical infrastructure will help your organization thrive long-term.