Instructions - IRS Form 1023

Application for 501(c)(3) Exemption
Instructions - How to Complete IRS Form 1023

Introduction

IRS Form 1023 is used for nonprofits that aren't qualified to use the simplified application designed for certain types of small organizations (IRS Form 1023-EZ).

Form 1023 is completed online through the IRS website. Click here for a quick preview to see what it looks like.

The Small Business Clinic will not be responsible for preparing the on-line application - BUT - it will provide hands-on assistance to help guide the nonprofit through the process.

At the request of a client, the Small Business Clinic may review partially completed draft on-line applications to answer questions and to offer suggestions. From time to time, at a client's request, the Clinic may step in and directly revise text that has already entered into the online application in order to help improve the quality.

Step One

Step Two - Complete the Application

After doing that you will then be given two choices. DO NOT CHOOSE THE "STREAMLINED" FORM (the first choice listed which is for Form 1023-EZ). Instead, choose the second choice (for the regular Form 1023)

Then Complete the on-line form (you can save a partially completed draft and continue working on it a later time)

Step Three - Tips on completing
the "Narrative" & "Statement of Revenue & Expenses"

INTRODUCTION: The most difficult and important parts of the application are the requirements for a detailed narrative description of the nonprofit's activities and a spreadsheet listing its past and future (estimated) revenue and expenses for specified years. It is recommended that the early drafts of these sections first be done off-line

RECOMMENDATION - Create the initial drafts of the "Narrative" Offline and then copy and paste the text of the final version into the on-line application. Creating it off-line will allow the Small Business Clinic to better collaborate with you in creating the final versions.

Focus only on actual activities. Do not include your mission statement or marketing hype.

For each past, present, or planned activity, include information that answers the following questions:

What is the activity?
Who conducts the activity?
Where is the activity conducted?
What percentage of your total time is allocated to the activity?
How is the activity funded (for example, donations, fees, etc.) and what percentage of your overall expenses is allocated to this activity?
How does the activity further your exempt purposes?

INCLUDE ONLY CONCRETE ACTIVITIES. Do not include vague ideas that you may or may not implement. Include only those activities that you are presently engaged in or hope to actually implement during the next two years and which you can describe with some detail. Remember, if you blurt out some vague future plans without providing detail you will be inviting the IRS to ask you follow-up questions which will delay approval.

INADVERTENTLY IMPLY LOBBYING. Don't inadvertently brag about how you plan to go down to City Hall and demand better code enforcement in order to clean up the neighborhood (etc.). This could be interpreted by the IRS to be lobbying and could trigger follow-up questions from them after you submit your application.

INADVERTENTLY IMPLYING PRIVATE BENEFIT. The exemption will be denied if the IRS determines that the purpose is primarily for private benefit. Be careful not to imply in your narrative that benefits that will be enjoyed by specified individuals or the organization's membership (unless, of course that is to be the case). The activities of an exempt charitable organization must primarily be for the benefit of the public and NOT private interests. Inadvertently implying private benefit in your narrative will invite a follow-up grilling from the IRS after you have submitted your application and thus delay approval.

It is OK to pay reasonable compensation for services actually performed BUT payments to insiders raise concerns about possible impermissible private benefit. It is best that anyone that regularly receives compensation NOT be a member of the board of directors.

"UNRELATED TRADE OR BUSINESS": Be careful in describing your activities in the narrative. You don't want to unintentionally leave the impression that an activity is an "unrelated trade or business". Click here for short article discussing this issue. This becomes a problem when your proposed activity is similar to a non-exempt activity carried on by a for-profit business. The bottom line for the IRS is unfair competition. You have to convince the IRS that the proposed activity is going to be operated differently from any similar activities that might be carried on by for-profit businesses.

Some people think that an activity is exempt merely because the profits are to be spent doing something charitable. THIS IS NOT THE CASE. The activity itself must further a charitable purpose.

The IRS will allow you to engage in some unrelated trade or business activities so long as it is not "substantial" (you will be required to pay tax on any profits)

IRS Instructions CLICK HERE to view the IRS line-by-line instructions. Print them for use as a quick reference as you prepare the statement.

RECOMMENDATION: Perhaps create the initial draft using an off-line spreadsheet (then later, copy that data to the on-line form). - click here to download a spreadsheet template that you can use. (If in existence 5 years or more use THIS version)

The task is easier than it is for an organization with more than one tax year because you can pretty much just make up numbers based on your good faith expectations

Your job is more difficult because you must use the actual numbers (and not merely a good faith estimate).

Revenue: Most (if not all) projected revenue should be shown on line #1 ("gifts, grants, contributions"). This would include government funding. Read the instructions carefully, however, to make sure that none of the other lines apply.

Expenses
- Compensation for Services: You've got four choices for entering compensation paid for services:
- Other Expenses: If truthful, list ALL other expenses in following three lines (but read the instructions carefully to make sure that none of the other lines apply).

Prepare a "Conflict of Interest Policy" -

Prepare the Conflict of Interest policy that is a required attachment to Form 1023 and have it adopted by the applicant's board of directors. Click Here to download the sample conflict policy document recommended by the IRS (it must be edited to make it suitable for particular organizations). Click Here for the annual statement to signed by each director (only the Conflict of Interest Policy and NOT the annual statement are to be attached to the exemption application)

FINAL CHECKLIST:

On Form 1023, near the end, there is a final checklist page. Assemble your packet for submission following the order of the documents outlined in that checklist. It gives instructions on where to send the application and how to handle the filing fee

COVER LETTER: prepare a short cover letter to be signed by the corporations president explaining that you are applying for tax exempt status and that your application is attached. Include the following statement: "the attached bylaws are a true and correct copy of the bylaws that are currently in effect".