Question of the Week: Can a Charity Raise Funds Before It Receives 501c3 Status?

A reader recently asked the following question:

"I want to start a nonprofit for single parents with a employment staffing component to it, along with a liberal housing and education arm. Is there a way to fundraise in an effort to obtain the startup funding without having forwarded the IRS forms for nonprofit status approval? The operational funds are what our agency would need."

I invited Emily Chan of the NEO Law Group who also writes the Nonprofit Law Blog, to explain. Here is her answer:

"Organizations can fundraise prior to receiving 501(c)(3) tax-exempt status. However, contributions received prior to obtaining tax-exempt status are not tax-deductible.

If the organization is subsequently granted exemption and the date of exemption precedes the date of the contribution, the donor may then be eligible to take a tax-deduction for that contribution which may require an amendment to that donor's personal tax return. (Exemption, if granted, is generally retroactive to the date of incorporation if the application is filed within 27 months of incorporation. Otherwise, exemption, if granted, is recognized as of the date the application is filed).

Organizations should not give tax advice to donors but should inform donors they are not recognized as tax-exempt and the application is pending (if applicable). They should not represent that they are certain to receive 501(c)(3) status.

Additionally, organizations should inquire with its state of incorporation and other states where they actively fundraise about state filing requirements for entities that solicit charitable contributions."

_{This communication was not written or intended to be used, and may not be used, by any taxpayer for the purpose of (i) avoiding any tax-related penalty under the Internal Revenue Code, or (ii) promoting, marketing or recommending a tax-related transaction described herein.}

Read more Q&A:

• Where Can I Find Financial Information About a Nonprofit?
• Where Should We Incorporate Our Nonprofit?
• How Do We Get Rid of an Outdated Restricted Fund?

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