What happens if a nonprofit entity applies for tax-exempt status 27 months or more after its formation?
We’re late! We’re late! For a very important date!
For a variety of reasons a nonprofit entity may file as a nonprofit under Arizona law, but then not apply for status as a Section 501(c)(3) tax-exempt organization for federal tax purposes. If Internal Revenue Service (“IRS”) Form 1023 is not filed within 27 months of the date of the entity’s formation, what options are available to the entity if it later wants to apply for federal tax-exempt status?
First, the entity has the option of filing the Form 1023 and indicating its willingness to accept the postmarked date of the application as the date of its designation as a Section 501(c)(3) federally tax-exempt entity. In that instance, the income of the entity prior to the postmarked date will be taxable and any donations made to the entity prior to that date will not be deductible.
Second, the entity can file Form 1023 and then on Schedule E of Form 1023 ask for an extension of time. A detailed written statement explaining the reasons for the request must be attached. The statement needs to include, among other things: the date the application was required to have been filed and the date it is actually being filed; an affidavit detailing the events that led to the entity’s failure to meet the deadline; and a declaration made under penalty of perjury by an authorized officer or agent of the entity assuring the veracity of the information in the statement and any accompanying documents. The IRS will review the request and if in its discretion the request is granted, the entity will be designated as tax-exempt under Section 501(c)(3) from the date of its formation. If the request is denied, the postmarked date of Form 1023 will be the date of designation.
Finally, the entity can file Form 1023, accept the postmarked date as the date of recognition under Section 501(c)(3), and then request designation under Section 501(c)(4) for the period of time from the date of its formation to the postmarked date. To make that request, the entity must not only file Form 1023 and Schedule E to Form 1023, but must also file page 1 of Form 1024. If this request is accepted by the IRS, the entity will be treated as a civic organization under Section 501(c)(4) from the date of formation to the postmarked date and its income will be exempt from federal income tax during that period. Contributions made to the entity during that period, however, will not be deductible as charitable contributions.
Navigating the myriad of additional IRS requirements applicable to entities applying for exemption under Section 501(c)(3) 27 months or more after their formation can be both complex and frustrating. Given that fact, the entity would be best advised to enlist the aid of an experienced legal professional.