How to Get 501(c)(16) Tax-Exempt Status

An organization classified under Internal Revenue Code (IRC) Section 501(c)(16) is a nonprofit corporation established to finance the crop operations of its members. These entities are not general agricultural organizations, as their purpose is narrowly defined to provide financial assistance for growing crops. To receive an exemption from federal income tax, these corporations must be organized to function with a farmers’ cooperative and follow a formal application process with the Internal Revenue Service (IRS).

Organizational and Operational Requirements

To qualify for tax-exempt status under IRC Section 501(c)(16), a corporation must be organized with the exclusive purpose of financing the ordinary crop operations of its members. These activities are performed in conjunction with an associated farmers’ cooperative, with the 501(c)(16) organization providing the necessary capital.

A primary requirement is that the organization must operate in conjunction with a farmers’ cooperative association that is itself tax-exempt under IRC Section 521. This relationship ensures that the financing corporation serves the members of an established and qualifying cooperative, reinforcing its specific agricultural mission.

The rules governing the capital stock of a 501(c)(16) organization are also quite specific. All of the corporation’s stock must be owned either by the associated exempt farmers’ cooperative or by the individual members of that cooperative. This ownership requirement prevents outside investment and ensures the corporation remains controlled by the farmers it is intended to serve.

There are also clear limitations on the financial structure. The corporation is permitted to accumulate and maintain a reserve for any necessary purpose, such as to cover potential losses on loans or to ensure future financial stability. Any dividends paid on the capital stock are subject to a cap; the dividend rate cannot exceed the legal rate of interest in the state of incorporation or 8% per year, whichever is greater.

Required Information for Exemption Application

To be recognized as tax-exempt, an organization must file Form 1024, Application for Recognition of Exemption Under Section 501(a), with the IRS. An organization must have an Employer Identification Number (EIN) before submitting its application.

A complete application package must include several supporting documents.

• A complete copy of the organization’s primary organizing document, such as its articles of incorporation, along with any amendments. This document must contain language that aligns with the requirements of a 501(c)(16) organization.
• A copy of the corporation’s bylaws, which outline the rules and procedures governing the organization’s operations.
• A detailed narrative describing the organization’s specific activities and its functional relationship with the associated farmers’ cooperative.
• Current financial statements showing assets, liabilities, income, and expenses if the organization has been in existence. For new organizations, financial projections are required.

The Application Filing Process

Once Form 1024 is complete with all supporting documents, the application must be submitted electronically to the IRS through the Pay.gov portal. Paper-based submissions are generally no longer accepted for this type of application.

A required user fee of $600 must be paid at the time of submission. Payment is made directly through the Pay.gov platform, and the application will not be processed until the fee is paid.

After the application package is submitted, an IRS agent will examine the documents to determine if the organization meets all statutory requirements. If the application is approved, the IRS will issue a determination letter, which is the official document recognizing the organization’s tax-exempt status.

Annual Filing Obligations

Organizations with 501(c)(16) status have ongoing compliance responsibilities to maintain their tax-exempt status. The most significant of these is the requirement to file an annual information return with the IRS, which provides transparency regarding the organization’s finances and activities.

The specific form an organization must file belongs to the Form 990 series. The choice of form—Form 990, Form 990-EZ, or Form 990-N (e-Postcard)—depends on the organization’s annual gross receipts.

These annual returns are due by the 15th day of the 5th month after the end of the organization’s accounting period. For organizations using a calendar year, the deadline is May 15th. Failure to file this annual return for three consecutive years will result in the automatic revocation of the organization’s tax-exempt status.