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Does My Nonprofit Really Need to Apply for 501(c)(3) Status?

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Question: Does My Nonprofit Really Need to Apply for 501(c)(3) Status?
Answer:

Many nonprofits do not need to apply for 501(c)(3) status. Here are two questions to ask yourself before you go through the arduous process of applying:

  • Will your nonprofit bring in enough taxable income to make avoiding taxes a concern? If your organization does not bring in any income from business activities, it won't owe any taxes. Furthermore, if income is from a business activity that is not related to your nonprofit purposes (unrelated business activity), that income will be taxable whether you are tax-exempt or not.

    But, if you plan to have a business activity that is related to your mission (fees from clients receiving your services for instance), then being tax-exempt will save you money.

  • Do you need to be eligible for grants or to attract large contributions? Many organizations depend on contributions and grants, but many others do just fine with small contributions. Your nonprofit may only need to raise money from people who don't care about deducting their donations for tax purposes. In that case, and if you won't need to apply for grants, you really don't need to pursue 501(c)(3) status.

    But, if you do plan to apply for grants from foundations or other sources that usually only provide grants to tax-exempt organizations; and if you plan to ask individuals or organizations for larger contributions, then do go ahead and apply for tax-exempt status. Without it, you will not be able to attract major donors or compete for grants.

Consider the advantages and disadvantages of being an unincorporated association or using a fiscal sponsor instead of becoming tax-exempt or until you do.

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