What Are the Requirements for IRC Section 501(c)(3)?

Tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3) is a designation for nonprofit entities granted by the Internal Revenue Service (IRS). The primary benefits are exemption from federal income tax and the eligibility to receive charitable contributions that are tax-deductible for the donor. This status is available to corporations, trusts, and unincorporated associations that meet the requirements of the tax code.

Core Requirements for Tax-Exempt Status

To qualify for 501(c)(3) status, an organization must satisfy both an organizational and an operational test. The organizational test focuses on the language within the entity’s formation documents, such as its articles of incorporation. These documents must limit the organization’s purposes to one or more exempt purposes and include a specific dissolution clause stating that upon dissolution, its assets will be distributed for a charitable purpose.

The operational test requires that the organization’s activities primarily further its stated exempt purposes. The IRC lists these purposes as:

• Charitable, religious, educational, scientific, or literary purposes
• Testing for public safety
• Fostering national or international amateur sports competition
• Preventing cruelty to children or animals

An organization is deemed “charitable” if it provides relief to the poor, advances religion or education, or lessens the burdens of government. An organization must engage in activities that directly accomplish its mission, such as an educational organization running a school. While an organization can conduct some non-exempt activities, they cannot constitute a substantial part of its overall operations.

Prohibited Activities and Operational Constraints

Maintaining 501(c)(3) status requires adhering to a prohibition against private inurement. This rule dictates that none of the organization’s net earnings may benefit any private shareholder or individual, such as by paying an executive an unreasonably high salary. A related constraint is the prohibition on providing a substantial private benefit to any individual, even if they are not an insider.

If a transaction provides an excessive economic benefit to a “disqualified person”—someone in a position of substantial influence—the IRS can impose excise taxes on both the person who benefited and the organization’s managers who approved it.

All 501(c)(3) organizations are prohibited from participating or intervening in any political campaign for or against any candidate for public office. This ban includes making financial contributions or publishing statements supporting or opposing a candidate. Violation of this rule can lead to the revocation of tax-exempt status.

Organizations are permitted to engage in some lobbying to influence legislation, but it cannot form a “substantial part” of their overall activities. The IRS uses either the “substantial part test” or the “expenditure test” to measure this. Exceeding these limits can result in excise taxes and, in serious cases, loss of exemption.

Required Information for the Exemption Application

Before an organization can apply for 501(c)(3) status, it must gather specific documents. The first step is to obtain a federal Employer Identification Number (EIN), even if the organization does not have employees. The EIN is a unique number the IRS uses to identify the business entity.

Next, the organization must prepare its legal organizing documents. For a corporation, this means state-filed articles of incorporation; for a trust, it is the trust agreement. Additionally, the organization should adopt bylaws, which are the internal operating rules that dictate how it will be governed.

A main part of the application is a detailed narrative describing the organization’s activities—past, present, and planned. This narrative must explain how each activity furthers one of the exempt purposes, providing enough detail for the IRS to understand the organization’s operations.

Financial data is also required. The organization must provide financial statements for the current year and the three preceding years, if applicable. If newly formed, it must provide proposed budgets for the next three years showing projected income and expenses.

This information is compiled to complete IRS Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” The official form and its instructions are available on the IRS website and must be used for the application.

The Application Submission Process

Once Form 1023 is completed, the organization must submit it electronically. All applications for 501(c)(3) status must be filed online through the government portal Pay.gov, as the IRS no longer accepts paper applications.

At the time of submission, the organization must also pay a non-refundable user fee. The fee amount is set by the IRS; as of early 2025, the fee for Form 1023 is $600. This payment is processed through the Pay.gov platform.

After the application is submitted, the IRS will send an acknowledgment of receipt. The application is then assigned to an IRS agent for review, a process that can take several months. The agent may contact the organization with follow-up questions or for additional information, and once the review is complete, the IRS will issue a determination letter granting or denying 501(c)(3) status.