The recognition of your organization as a 501(c)(3) tax-exempt nonprofit by the IRS offers numerous advantages and is necessary to help your organization grow. First, let’s clear up a couple of the misconceptions.
Not all nonprofit organizations are tax exempt. Just because you have incorporated as a nonprofit, not-for-profit, or nonstock corporation does not mean that your organization is exempt from paying taxes. The legal formation of a nonprofit is a state law concept, and although you may have some privileges, not paying taxes to the IRS (and state if applicable) is not one of them.
Donations to a nonprofit are not always tax deductible. If you have not obtained your 501 c organizations status, but you are operating and receiving donations, you may have donors writing off their donations because they believe their donations to be tax deductible. If this is happening, your new organization could suffer severe consequences through the loss of trust once one of your donors is questioned by the IRS.
Per 501(c)(3) definition, by obtaining 501(c)(3) status for your nonprofit, your benefits include the following:
Donations to your organization from the general public will be tax exempt. This includes individual donations and corporate donations. We all know that money motivates most people, so what better way to motivate someone to give to your organization than to offer them the chance to lower their tax burden?
The 501(c)(3) status will also qualify your organization for grants from the government and private foundations. Most grant opportunities require that you have this status before applying for funding. This means that without the 501 c 3 forms showing active status, your organization will not even be considered for most grant funding.
The status brings a sense of prestige throughout the nonprofit community. If you are looking to grow your organization by partnering with other nonprofits, government agencies, and even corporations, the 501(c)(3) nonprofit corporation status will be necessary for most of these organizations to take you seriously. One reason is the application process for your tax-exempt status allows the IRS to review your organization’s purpose, activities, and processes. This takes some of the guesswork out for other organizations to ensure that your organization is organized and operating for the correct reasons.