501(c)(3) process

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501(c)(3) is a tax-exempt designation from the IRS which generally applies to nonprofit organizations. 501(c)(3) refers to that section of the tax code, found at 26 U.S.C. § 501.

Being a 501(c)(3) has the following benefits (copied from the interwebs)

  • We won't pay federal corporate income tax except on income derived from unrelated business income. With this exemption, an organization can save 15% - 35% of its taxable income.
  • In most instances, we won't pay state corporate income, franchise, excise, use, or sales tax.
  • Can offer members, individuals, and corporate donors a tax deduction for their contributions.
  • Eligible to receive private foundation grants. Private foundations are required by law to distribute a minimum amount of money for charitable purposes. One way they fulfill this obligation is by making grants to 501(c)(3) public charities.
  • Eligible for lower postal rates on third class bulk mailings through the US Postal Service.

The process

Phase 1: Get Organized

  1. Come up with our Mission Statement
  2. Develop our fundraising plan (see Mo money...) We don't need this to incorporate in Maryland, but we'll something like this for our 501(c)(3) application.
  3. Draft Bylaws. We don't need this to incorporate in Maryland, but we'll something like this for our 501(c)(3) application. (Initial drafting is done, needs to be reviewed by more people)
  4. Select a few people to act as incorporaters. These people will have their name in the Articles of Incorporation and act as the interim Board of Directors until our organizational meeting.
  5. File our Articles of Incorporation with the state of Maryland. The application fee is $170 and takes 7-8 weeks. Or $220 for same day, in person service at their office. State Department of Assessments and Taxation, Charter Room 801, 301 W. Preston Street Baltimore, MD 21201-2395
  6. Apply for an Employer Identification Number (EIN) so we can open a bank account. This is a simple form on the IRS website. Someone on the interim Board of Directors can fill out the online form and we'll get an EIN immediately
  7. Open a Bank Account. One of the interim members of the Board of Directors can do this once we haven an EIN.
  8. Hold our organizational meeting where we will ratify the bylaws and elect Officers (President, VP, Treasurer, Secretary) who will also serve as the Board of Directors. (At least that's what's in the draft Bylaws at the moment.) We need to take special care in keeping minutes at this meeting for later filings.

Phase 2: Register for Charitable Solicitation

  1. In order to "solicits charitable contributions" we need to register with Maryland by submitting form COR-92. There is no fee if we solicit less than $25,000 in a year. A renewal form must be submitted annually. It seems that there is an exemption for soliciting donations from members.
    • The membership-only exemption is in the case that it is only from members that donations are ever solicited. This would mean we could never solicit donations (e.g., donation jar next to the keg) outside the voting membership of the organization. 21:14, 6 July 2009 (UTC)
  2. If we want to solicit contribution in another state, there is more paperwork to file.

Phase 3: Obtain Federal Tax-Exemption Determination

  1. File IRS Form 1023: Application for Recognition of Exemption Under Section 501(c)(3). We are anticipating annual revenue over $10,000 so the application fee will be $750.
  2. In a few months we'll get a designation letter back from the IRS authorizing you to be a nonprofit for five years. At the end of five years we have to prove to the IRS that we are really a charitable organization and submit form 8734.

Phase 4: State filings after receiving 501(c)(3) determination letter

  1. Obtain a sales and use tax exemption certificate by filing Combined Registration Application
  2. Request State Income Tax Exemption. This is mentioned on this page, but isn't mentioned elsewhere.
  3. There is a property tax exemption should we ever end up owning property

Maintaining our status

  1. Each year we will need to file Personal Property Forms with the state.
  2. File Form 990 with the IRS depending on annual gross receipts if necessary. If we don't have to file a 990, we have to submit COF-85 if not filing IRS Form 990