A guide to securing 501(c)(3) status, and what it means for your organization

An organization doesn't have to file for not-for-profit status with the IRS in order to collect charitable donations. But it helps.

Securing not-for-profit status means the organization can be exempt from paying income tax. Furthermore, those who donate to the organization can deduct the contribution from their own income taxes.

The decision to become a not-for-profit is a relatively easy one for large organizations with the means to apply and the potential to benefit greatly from the tax breaks. But for smaller organizations, the benefits may not outweigh the cost and time commitment.

The first step for an organization is to determine whether it meets all the qualifications of a not-for-profit before beginning the process in earnest.

"First of all, you have to determine what kind of organization you are: Is it an organization that has some purpose for the common good?" says Catherine White, a partner at the accounting firm Begley, Young, Unterreiner and White in Cape Girardeau. "Generally, that's why you would want to obtain the nonprofit status."

Craig Marshall plays the keyboard while performing with the Tone Def All-Stars at HotShots during the 2015 Happy Slapowitz Toy Bash in downtown Cape Girardeau.

There are a number of different not-for-profit statuses assigned by the government. The 501(c)(3) status is the most common, applying specifically to charitable organizations.

Charitable not-for-profit organizations are limited in the amount of lobbying they can do and are completely restricted from operating for the benefit of private interests. The organization's earnings, according to the IRS, cannot benefit a private shareholder or individual.

This was one of the driving factors that moved Ryan Eftink to apply for 501(c)(3) not-for-profit status for the charity he co-founded, Happy Slapowitz Toy Bash. The annual event features live music across multiple venues in an effort to provide new Christmas toys for children through the Marine Corps League's Toys for Tots program. He says the lack of status was beginning to become a liability.

"I have a business of my own, and I didn't want people thinking [Happy Slapowitz Toy Bash] was running through my business," Eftink says. So after a decade operating without the IRS designation, they began the process of securing it.

The potential benefits, he says, were numerous. Along with a level of transparency he didn't have before, the new status made it easier for him to secure larger donations because organizations now have the added benefit of being able to write off the contribution.

Volunteers with the Happy Slapowitz Toy Bash hold the receipt from all the toys purchased at Toys'R'Us with the money raised during the annual fundraiser in 2015.

In addition to the user fee, the organization must secure a tax ID number, provide financial statements and submit organizing documents.

"There's a lot of narrative in it: descriptions of your mission and how you're going to go about accomplishing that mission," White says of the application.

The work becomes more involved when an organization has been operating without not-for-profit status. The IRS, White says, will want to know the financial history of the organization: How much money was brought in? Where did it go?

Because Eftink's charity was in one of the lower earning brackets, the actual paperwork was much simpler than that of larger organizations. But he sought out the help of a professional, and he regrets nothing. He says they helped his organization avoid pitfalls and guided them through setting up bylaws, board members and trustees.

"Setting that up was probably more difficult than the 501(c)(3) status," Eftink says.

Andy Robert portrays Santa Claus during the 2015 Happy Slapowitz Toy Bash in downtown Cape Girardeau.Submitted photo

But not all organizations seek professional advice when securing their status.

The Cape Girardeau Roller Derby sought not-for-profit status without the assistance of a professional. Jen Rose, former treasurer of the derby team, took on the task of securing not-for-profit status without any training or background. It was a time-consuming process, she says, but also a manageable one.

An accountant probably could have avoided some of the roadblocks she ran into along the way, she admits, but ultimately she secured not-for-profit status, though not the one she originally sought.

"We're a 501(c)(4) because we're an entertainment-based business," she says. "However, other roller derby leagues throughout the state and the country operate as 501(c)(3)."

Beyond the initial status acquisition, the not-for-profit does have work to do to maintain its status. This, White says, is the bulk of her firm's work with 501(c)(3) organizations.

"There are requirements that you need to report to the IRS about your activities, about how much money comes in. And there's different forms you have to fill out depending on what your gross income is and what your assets are," she says.

For smaller organizations bringing in less than $50,000, much of this can be done by way of a 990-N, essentially a postcard, as part of a process streamlined by the IRS. The bigger not-for-profits have more cumbersome paperwork.

"The next level is a 990-EZ. That's if you have gross receipts under $200,000. And then if you're above $200,000, then you need to do the 990, which is much more complex," White says. "Probably for the 990EZ and the 990, you would want a professional to prepare that for you."

Eftink, from his experience, recommends speaking to an accountant and a lawyer before seeking not-for-profit status.

"The accountant, he can set everything up for you and do it right, but then I would also have some type of counsel on board with you as well," he says.

Rose recommends, if possible, doing considerable research in the early stages of an organization, before it's fully established. She says changing things down the line, like bylaws and articles of incorporation, can be very difficult. So the earlier an organization can start thinking of its not-for-profit in those terms, the better.

White, too, stresses the necessity of reading up before moving forward, and praises the IRS's "Stay Exempt" website as a wealth of information for those seeking 501(c)(3) status.

"It's important to do your research before you start this," White says. "There are a lot of legal, financial ramifications."

More information about securing nonprofit status can be found at www.stayexempt.irs.org.