How to Start a Charity for Tax Purposes

To create a charity for tax purposes means forming an organization recognized by the Internal Revenue Service (IRS) as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. This designation provides two tax advantages. The first is that the organization itself does not pay federal income tax on revenue related to its charitable mission. The second is that donors can generally claim a tax deduction for their contributions.

Achieving this status requires establishing a legal entity, adopting a formal governance structure, and submitting a detailed application to the IRS for approval. This process ensures that the organization is organized and operated exclusively for specific exempt purposes, such as charitable, religious, or educational missions.

Establishing the Legal and Governance Structure

Before an organization can apply for federal tax-exempt status, it must first establish a formal legal existence. The initial decision involves choosing a legal structure, which is typically either a nonprofit corporation or a charitable trust. A nonprofit corporation is a distinct legal entity formed by filing articles of incorporation with a state, a process that provides a liability shield for its directors and officers. A charitable trust is a structure where a trustee manages assets for a charitable purpose, governed by a trust agreement.

Once the structure is chosen, the creation of organizing documents is the next step. The primary document for a corporation is the Articles of Incorporation, which must contain specific language required by the IRS, including a statement of the organization’s charitable purpose and a dissolution clause. This clause must specify that upon dissolution, any remaining assets will be distributed for an exempt purpose. The second document is the bylaws, which are the internal operating rules for the organization.

A Board of Directors must be appointed to govern the organization. This body holds the ultimate responsibility for the organization’s actions and is subject to fiduciary duties of care, loyalty, and obedience. The board oversees the organization’s mission, ensures financial solvency, and provides strategic direction.

Finally, the organization must obtain an Employer Identification Number (EIN) from the IRS by filing Form SS-4. An EIN is a unique nine-digit number that identifies the business entity for tax purposes and is a prerequisite for nearly all subsequent financial and regulatory activities.

Information and Documents for Federal Application

The IRS provides two primary application forms for tax-exempt status: Form 1023, the detailed application, and a streamlined version, Form 1023-EZ. To use Form 1023-EZ, an organization must project annual gross receipts of $50,000 or less and have total assets under $250,000. However, numerous other factors can make an organization ineligible. For instance, organizations that have previously had an application for tax-exempt status denied or are involved with digital assets are barred from using Form 1023-EZ. Applicants must review the detailed eligibility worksheet on the IRS website.

The standard Form 1023 requires detailed information. A primary component is a comprehensive narrative describing the organization’s activities—past, present, and planned—and explaining how each activity furthers the organization’s exempt purpose. The application demands detailed financial data, including statements of revenue and expenses for past years and financial projections for the next three to four years.

Further information required includes details about the organization’s governance and compensation practices. The application asks for information about officers, directors, and trustees, including their qualifications and any compensation they will receive. The IRS scrutinizes this to identify potential conflicts of interest or private inurement. Descriptions of fundraising programs are also required.

Applicants must attach copies of their organizing documents, such as the certified Articles of Incorporation and the adopted bylaws. The official, most current versions of Form 1023 and its instructions can be found on the IRS website.

The Federal Application Process

Both Form 1023 and Form 1023-EZ must be submitted electronically through the Pay.gov portal, as paper applications are no longer accepted. This online submission process requires creating an account on the Pay.gov website to access the forms and upload the necessary attachments.

A required user fee must be paid at the time of submission. As of early 2025, the user fee for Form 1023-EZ is $275, while the fee for the standard Form 1023 is $600. The application is not considered filed until the fee is successfully paid.

After submission, the application is assigned to an IRS specialist for review. The processing time can vary significantly, from a few months to over a year, depending on the complexity of the application and the IRS’s workload. The reviewing agent may send a letter with follow-up questions or requests for additional information.

Upon successful review, the IRS will issue a determination letter. This official document confirms the organization’s recognition as a 501(c)(3) public charity, retroactive to its date of formation if the application was filed within 27 months of incorporation. This letter is the definitive proof of tax-exempt status and is essential for fundraising and state-level registrations.

State Registration and Filing Requirements

Securing federal 501(c)(3) status from the IRS does not automatically authorize a charity to solicit donations in every state. Most states have their own, separate registration requirements for charities that intend to ask for contributions from their residents. These rules are designed to protect donors from fraudulent solicitations and are typically enforced by a state agency, such as the Attorney General’s office.

The registration process and requirements differ from one state to another. A charity must file an initial registration form before soliciting any donations within that state’s borders. This often involves submitting copies of organizational documents, including the Articles of Incorporation, bylaws, and the IRS determination letter. Some states may also require a list of officers and directors and financial information.

These state-level registrations are not a one-time event, as most states require charities to renew their registration annually. The renewal process typically involves filing an annual report. Failure to comply with these state charitable solicitation laws can result in financial penalties and prohibitions on fundraising.

Maintaining Tax-Exempt Status

A charity must adhere to ongoing compliance obligations to maintain its tax-exempt status. A primary responsibility is the annual filing of an information return with the IRS. The specific form required depends on the organization’s financial activity.

• Form 990-N: An electronic postcard for organizations with gross receipts normally $50,000 or less.
• Form 990-EZ: For organizations with gross receipts under $200,000 and total assets under $500,000.
• Form 990: A detailed return for larger organizations.
• Form 990-PF: For private foundations.

Charities are also subject to public disclosure rules. They must make their approved application for exemption and their annual information returns available for public inspection upon request. This transparency allows the public and potential donors to review the charity’s operations and finances.

Record-keeping is another requirement. A charity must maintain detailed financial records that substantiate the information reported on its annual return. These records are necessary to demonstrate that the organization is operating in a manner consistent with its charitable purpose.

Finally, the organization must operate within specific rules. There is a prohibition against private inurement, meaning none of the organization’s net earnings may benefit any private shareholder or individual. While charities can engage in some lobbying activities, there are limits, and 501(c)(3) organizations are prohibited from participating in any political campaign activities. Income from activities not related to its exempt purpose may be subject to Unrelated Business Income Tax (UBIT).