The Internal Revenue Service (IRS) recently finalized regulations that will streamline the process for obtaining small exempt organization status. Form EZ-1023 is welcome news given the time and information required to complete the standard Form 1023.

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Benefits of Small Exempt Organization Status

Under Section 501(c)(3) of the Internal Revenue Code (IRC), certain nonprofit organizations are recognized as exempt from federal income tax. To be tax-exempt under section 501(c)(3), an organization must be organized and operated exclusively for exempt purposes set forth in the IRC. The most common types of 501(c)(3) entities are charitable, educational, and religious organizations.

Section 501(c)(3) further requires that none of the organization’s earnings inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

To obtain tax-exempt status, organizations must apply to and be recognized by the IRS. While this process is often a time-consuming process, it has significant benefits. Organizations that receive an IRS determination of 501(c)(3) status are exempt from federal income tax and are eligible to receive tax-deductible charitable contributions from donors.

Streamlined Requirements of Form 1023-EZ

Previously, organizations seeking tax-exempt status under section 501(c)(3) had to submit a properly completed and executed Form 1023, “Application for Recognition of Exemption Under 501(c)(3).”

On July 2, 2014, final and temporary regulations authorizing the Commissioner to adopt a streamlined application process that eligible organizations may use to apply for recognition of tax-exempt status under section 501(c)(3) were published in the Federal Register.

Under the temporary regulations, the IRS instituted the streamlined application process on Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” the detailed procedures for which are set forth in Rev. Proc. 2017-5, 2017-1 IRB 230, and in the instructions for Form 1023-EZ. While any organization may file Form 1023 to apply for recognition of exemption from federal income tax under section 501(c)(3), only certain organizations are eligible to file Form 1023-EZ. Below are the key eligibility requirements:

  • The organization has projected annual gross receipts of $50,000 or less in the current taxable year and the next 2 years; 
  • The organization had annual gross receipts of $50,000 or less in each of the past 3 years for which the organization was in existence; and 
  • The organization has total assets the fair market value of which does not exceed $250,000. For purposes of this eligibility requirement, a good faith estimate of the fair market value of the organization's assets is sufficient.

Even if they satisfy the above criteria, certain organizations are not eligible to submit Form 1023-EZ and must use Form 1023 to apply for recognition of exemption under 501(c)(3). They include, among others: organizations formed under the laws of a foreign country and organizations that do not have a U.S. mailing address; organizations that are not corporations, unincorporated associations, or trusts, such as a limited liability corporation (LLC); organizations that were previously revoked or that are successors to a previously revoked organization; and churches or conventions or associations of churches, schools, colleges, or universities, and hospitals or medical research organizations described in IRC Section 170(b)(1)(A)(i).

As first discussed on Prof. Brunetti’s Tax News Blog, the IRS recently adopted as final regulation the proposed regulations issued in June of 2014 without any substantive changes. To determine if your organization qualifies for filing the new Form 1023-EZ, the IRS’s eligibility criteria are available here. It is also advisable to contact an experienced tax attorney to discuss any questions or concerns.

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Frank Brunetti, at 201-806-3364.