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Form 1023 vs. Form 1023-EZ: What’s the Difference?

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 What Is 501(c)(3) Status

The term “501(c)(3)” refers to the section of the Internal Revenue Code that governs certain kinds of tax-exempt organizations. In order to receive tax deductible donations, organizations must be:

    •       Charitable;
    •        Religious;
    •        Educational;
    •        Scientific;
    •        Literary;
    •        Testing for public safety;
    •        Fostering national or international amateur sports competition; or
    •        Preventing cruelty to children or animals.

Many foundations and other sources of grants require that the organizations they donate to maintain 501(c)(3) status.

While applying for 501(c)(3) status is a good idea for many nonprofits, there are some drawbacks. The application process may involve a great deal of paperwork, and 501(c)(3) status subjects organizations to increased reporting requirements. Furthermore, 501(c)(3) organizations are unable to engage in political activities, such as directly or indirectly participating in or donating to political campaigns.

What Forms Must Be Filed for 501(c)(3) Status?

So you’ve decided to file for 501(c)(3) status, but how do you do it? The IRS provides two different forms for this purpose: Form 1023 and Form 1023-EZ. Once you submit the form that is appropriate for your organization, the IRS will evaluate your application and then send you a determination letter, confirming that your organization may receive tax-deductible contributions.

“Gross receipts” includes all amounts received from all sources of funding without subtracting any costs or expenses, and if your nonprofit receives an average of less than $5,000 in gross receipts annually, you do not need to file either Form 1023 or 1023-EZ to receive tax-exempt status. However, it may be a good idea to file with IRS if your organization seeks grants from institutions that require you to present an IRS determination letter or if you anticipate your organization growing in the near future.

What’s the Difference?

Form 1023 is the standard option available to any organization wishing to apply for 501(c)(3) status. Smaller organizations seeking 501(c)(3) status may be eligible to file Form 1023-EZ, which is easier and shorter than the standard Form 1023 and which the IRS generally processes faster than the standard Form 1023.

 

Form 1023

Form 1023-EZ

Length

26 pages (including sub-schedules)

3 pages

Types of responses

Many questions require detailed narrative answers

Mostly “Yes/No” questions

Articles of Incorporation and Bylaws

Must be filed with Form 1023

Do not need to be filed with Form 1023-EZ

 

Filing Fee

$600

$275

Who Gets to File Form 1023-EZ?

Form 1023-EZ includes a 30-question worksheet that can help you determine whether or not you are eligible to file it for your organization. In order to be eligible, you must be able to answer “no” to all of the questions. Some of the most salient questions are:

  •  Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years?

                The total amount of funding, without subtracting costs or expenses, from all sources for your                  organization, must be less than $50,000 in the year you apply, and you must not expect to exceed           $50,000 in gross receipts in either of the next two years.

           ·       Have your annual gross receipts exceeded $50,000 in any of the past 3 years?

                 Your organization cannot have had a year in the past three years where its gross receipts                           exceeded $50,000.

      ·       Do you have total assets the fair market value of which is in excess of $250,000?

                 Your total assets include the combined total of your cash, accounts receivable, inventories,                       bonds  and notes receivable, corporate stocks, loans receivable, other investments, depreciable               and depletable assets, land, buildings, equipment, and any other assets. The combined value of               these assets must not exceed $250,000.

In addition to the requirements pertaining to your organization’s finances, your organization must be formed under the laws of the United States (or one of its territories/possessions, a federally recognized Indian tribal or Alaskan native government, or the District of Columbia) and must be a corporation, unincorporated association, or a trust. Organizations formed under the laws of a foreign country or formed as a Limited Liability Company (LLC) are ineligible to file Form 1023-EZ. If your organization is a church, school, or hospital, you will need to file the regular Form 1023.

Is It Ever a Good Idea to File Form 1023 Even Though an Organization Is Eligible for Form 1023-EZ?

While Form 1023-EZ is a cheaper, faster, and easier option if your organization is eligible to file it, there are some potential drawbacks. The regular Form 1023 forces organizations to think carefully about how they want to run their organization. Form 1023 requires organizations to think through their business plans, and it encourages compliance to make sure they can maintain 501(c)(3) status in the event of an audit.


By Daniel Schwartz  


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