How to Get 801 c (501c) Tax-Exempt Status

A common search query, “801c,” often reflects a misunderstanding of the correct term, which is “501(c).” This refers to a specific section of the Internal Revenue Code that provides for exemption from federal income tax for nonprofit organizations. These entities are formed to benefit the public or a specific group of members rather than private shareholders. While permitted to generate revenue that exceeds expenses, these earnings must be reinvested into the organization’s mission-driven activities. This article provides an overview of these organizations, the requirements for tax-exempt status, and the responsibilities for maintaining it.

Categories of 501(c) Organizations

The Internal Revenue Code contains more than two dozen classifications under section 501(c), each with distinct purposes and rules. The most widely recognized is the 501(c)(3) organization, which is formed for religious, charitable, scientific, literary, or educational purposes. A feature of 501(c)(3) status is that contributions made to these organizations are generally tax-deductible for the donor, which encourages public support. This category includes a wide array of entities, from public charities and churches to private foundations.

Another prevalent category is the 501(c)(4) organization, which is operated exclusively for the promotion of social welfare. These organizations can engage in a broader range of lobbying activities to advance their causes than 501(c)(3)s, but a significant trade-off is that contributions to 501(c)(4)s are not tax-deductible for the donor. This distinction is important for organizations focused on advocacy and policy change.

Business leagues, chambers of commerce, and boards of trade are typically organized as 501(c)(6) organizations. Their purpose is to improve business conditions within one or more lines of business, rather than performing services for individual members. Donations are not deductible as charitable contributions, though they may be deductible as a business expense. Other classifications, such as 501(c)(7) for social and recreational clubs, exist to serve specific membership-based purposes.

Requirements for Obtaining Tax-Exempt Status

Before an organization can apply for tax-exempt status, it must satisfy requirements established by the Internal Revenue Service. The process involves two primary evaluations: the organizational test and the operational test.

The organizational test focuses on the content of an organization’s founding documents, such as its articles of incorporation or trust instrument. These documents must explicitly limit the organization’s purposes to one or more exempt purposes as defined in Section 501(c). The language must also permanently dedicate the organization’s assets to an exempt purpose.

The operational test examines the actual activities the organization conducts. To pass this test, an organization must show that it is primarily engaged in activities that accomplish its exempt purposes. Any non-exempt activities must be an insubstantial part of its overall operations.

Information and Documents Needed for Application

An organization must gather several key documents and pieces of information before applying. The first action is to obtain an Employer Identification Number (EIN) from the IRS, which is required for all organizations, even if they do not have employees. This number will be used on all forms and official correspondence. The following items are also needed for the application package:

• Legally filed organizing documents, such as articles of incorporation, that state the exempt purpose and include a dissolution clause.
• Bylaws, which are the internal rules that govern the organization’s operations.
• A detailed narrative describing the organization’s past, present, and planned future activities.
• Financial data, including statements for the current and three preceding years, if applicable, and a proposed two-year budget.

The required application form depends on the specific 501(c) classification. For 501(c)(3) organizations, the standard application is Form 1023. Smaller organizations that project annual gross receipts of $50,000 or less and have total assets of $250,000 or less may qualify to file the streamlined Form 1023-EZ. Other common forms include Form 1024-A for 501(c)(4)s and Form 1024 for most other 501(c) classifications.

The Federal Application Process

The completed application package must be submitted electronically to the IRS through the Pay.gov portal, as paper applications are generally no longer accepted. A user fee is required at the time of submission. The fee for Form 1023 is $600, while the fee for Form 1023-EZ is $275.

After submission, the application is routed to the Exempt Organizations division for review. The processing time can range from a few months to over a year, depending on the complexity of the case and the IRS’s workload.

During the review, an IRS agent may be assigned to the case and contact the organization with questions or requests for additional information. If the IRS determines the organization meets all requirements, it will issue a favorable determination letter, which is the official document granting 501(c) tax-exempt status. This letter is retroactive to the date of the organization’s formation if the application is filed within 27 months of that date.

Maintaining Tax-Exempt Status

Maintaining tax-exempt status requires ongoing compliance with federal regulations. A significant responsibility is the annual filing requirement, where most organizations must file an information return from the Form 990 series. The specific form—Form 990, 990-EZ, 990-N, or 990-PF—depends on the organization’s gross receipts and asset value. These returns provide the IRS and the public with a transparent look at the organization’s finances and activities.

Organizations must also be mindful of unrelated business income (UBI). This is income generated from a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose. Net income from such activities is subject to the Unrelated Business Income Tax (UBIT), which is calculated at standard corporate tax rates.

All 501(c) organizations are prohibited from allowing their income or assets to benefit any private shareholder or individual, a rule known as private inurement. For 501(c)(3) organizations, there is an additional ban on participating in any political campaign on behalf of or in opposition to any candidate for public office. Violating these rules can result in penalties, including the revocation of tax-exempt status.