If you’re considering 501(c)(3) status, it likely means you’ve felt a calling to give back. Perhaps you’re forming a private foundation or public charity, or maybe this article is the first step in your non-profit journey. Wherever you are in the process, understanding the 501(c)(3) tax exemption is essential to helping your organization achieve its mission. This blog post provides a clear overview of the 501(c)(3) process, from getting started to maintaining compliance over time.

1. What Does It Mean to Have 501(c)(3) Status and Who Qualifies?

Achieving 501(c)(3) status means the IRS officially recognizes your organization as a tax-exempt non-profit. This status allows your organization to avoid paying federal income tax on funds related to your mission and enables donors to make tax-deductible contributions. This combination not only strengthens funding opportunities but also builds credibility with the community and potential partners.

To qualify, your organization must operate exclusively for IRS-approved purposes, including:

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

2. Establishing Your Organization

The first step toward 501(c)(3) status is legally establishing your non-profit, this can be done by working with an accountant or a lawyer. The IRS requires that non-profits be formed as a corporation, LLC, unincorporated association, or trust. Incorporation is the most common choice because it provides clear governance and is widely recognized in the tax-exemption process.

Next, you will need a board of directors. A board is required for 501(c)(3) recognition and is responsible for overseeing the organization’s activities and ensuring alignment with its mission. The IRS generally expects at least three unrelated individuals to serve on the board.

Obtaining an Employer Identification Number (EIN) from the IRS is also required for banking, tax filings, and your 1023 application. Many states, including Minnesota, require a separate state tax ID for employment or tax purposes.

With these steps completed, you can file for tax-exempt status using Form 1023 or 1023-EZ. To receive retroactive recognition, the application must be submitted within 27 months of incorporation. While the IRS reviews your application, you may operate and fundraise, but it is important to inform donors that your tax-exempt status is pending.

3. Filing for 501(c)(3) Status: Form 1023 and 1023-EZ

After forming your non-profit, the next critical step is applying for the 501(c)(3) tax-exempt status. You can submit either Form 1023 or the streamlined Form 1023-EZ.

Selecting the Appropriate Form

• Form 1023: Required for organizations with more complex structures or larger budgets. This form requires detailed financial information and a thorough narrative describing your organization’s activities.
• Form 1023-EZ: Available to smaller organizations with gross receipts under $50,000 and total assets under $250,000. This simplified form reduces time and complexity.

Preparing for the Application

Before filing, gather:

• Organizational Documents: Articles of Incorporation and Bylaws.
• Financial Information: Budgets and projections.
• Organizational Narrative: A concise description of your mission, programs, and activities aligned with 501(c)(3) purposes.

Application Submission and Processing

Both forms are submitted electronically through the IRS’s Pay.gov portal. Fees* are:

• Form 1023: $600
• Form 1023-EZ: $275

*Pricing as of 8-19-25.

Processing times vary:

• Form 1023-EZ: Typically, a few weeks to two months.
• Form 1023: Three to twelve months, depending on complexity.

CDS supports you through documentation, submission, and any IRS inquiries, helping increase the likelihood of a smooth approval.

4. Maintaining Compliance After Receiving Your Determination Letter

Receiving your 501(c)(3) determination letter is a major milestone, but maintaining compliance is an ongoing responsibility.

Appeals

If your application is denied, you may submit a formal appeal within 30 days of the denial notice. This involves addressing the reasons for denial and providing additional supporting information.

Ongoing Compliance Requirements

• Political Campaign Activities: Prohibited. Violations can result in revocation of tax-exempt status and penalties.
• Lobbying Activities: Must not be a substantial part of your activities.
• Private Benefit: Earnings cannot benefit private individuals or shareholders.
• Unrelated Business Income: May be taxed if substantial.

Annual Reporting

File Form 990 annually, reporting activities, governance, and financial information. CDS can ensure timely and accurate filings.

Other Compliance Requirements

• For employees, W-2 forms must be issued annually.
• Affordable Care Act reporting for employee health coverage.
• Workers’ Compensation insurance.
• Donor acknowledgments for contributions over $250.

Maintaining 501(c)(3) status involves careful attention, but with professional guidance from CDS, your organization can focus on its mission.

5. Minnesota Requirements for Local Non-profits

For Minnesota-based non-profits, here are a few additional state-level requirements to be aware of.

• State Sales Tax Exemption: Submit Form ST16 to the Minnesota Department of Revenue. Approval is not automatic.
• Board Composition: A minimum of three directors is required under state law.
• Annual Reporting: File an annual corporate report with the Minnesota Secretary of State to maintain good standing.

Conclusion: Staying Compliant and Focused on Your Mission

Achieving 501(c)(3) status is an important step toward advancing your organization’s mission. From forming your non-profit to filing with the IRS and maintaining ongoing compliance, professional guidance can simplify the process and reduce risk. With careful planning and support from our experts at CDS your organization can remain compliant while focusing on its goals and making a meaningful impact. Give one of our experts, Meranda Wacek or Mitch HJelle, a call at (888) 388-1040.

Meranda Wacek, CPA and Manager comments, 

“A strong mission is your best asset, 501(c)(3) status is the helpful tool for sharing that mission with the world.”