You have already had the brilliant idea and formed the nonprofit organization within your state to address the need in your community. Your organization meets all of the state requirements for a nonprofit organization, but you have discovered your efforts at fundraising are hampered by the fact that you do not have federal recognition of your nonprofit status; therefore funds to your organization are not tax deductible. What is your next step? How do you take your organization to that next level? Should you take your organization to that level?


If your organization has an attorney, you can ask if it is a prudent step. If you already know it is, then you can certainly complete the paperwork yourself. It is a process– and not a small one– to complete the forms and collect the documentation. Form 1023 from the IRS will guide you through the entire process. It also provides a complete checklist that you can use to make sure that you are providing the IRS with every piece of information, along with the appropriate user fee, that they require.


The organization needs to be aware that, while there are several advantages to receiving tax exempt nonprofit status (510c3 status), there are some disadvantages and the Board of Directors needs to have all of the information in hand when making the decision.


            Tax Benefit

Your organization will receive a tax benefit by having this status. The organization will need to contact qualified tax/accountant professionals to ensure that all state and federal rules and regulations are being followed. The primary tax benefit will be that an organization does not have to pay taxes on the profits earned at the end of the year. This will enable the nonprofit put more funds back into the organization to further your mission.


Donor Confidence

For many nonprofits, this is the key advantage. Donations made to your organization become tax deductible once you have received your 501c3 status. This status makes your organization so much more appealing and trustworthy in the eyes of donors.

This does not just apply to individual and corporate donors but to the Federal Government, as well. Almost 100% of the federal dollars awarded through grant competitions are awarded to organizations that have 501c3 status. Simply put; if you do not have nonprofit tax exempt status you are not eligible to apply for and receive federal funding. If your nonprofit does not think it will ever need to rely on federal funding, then this may be something that does not persuade your Board. However, diversifying funding streams is essential to every organization– profit and nonprofit.



We have all heard the phrase: “There is no such thing as a free lunch.” And obtaining and keeping your tax exempt status is evidence of that statement. While the advantages may bring in various quantities of much needed funds, it is not without a price. From the cost to complete the comprehensive federal forms (unless you feel qualified to complete the forms on your own) to the user fee that EVERYONE who applies has to pay.  The user fee changes frequently and it is advisable to double and triple check that fee before finally sending off the completed forms.


In addition,there are ongoing costs that are associated with maintaining your tax exempt status. These can include professional staff to monitor your program compliance, audit and accounting staff. Be aware before you apply that the costs do not stop when the application is mailed.


Red Tape

There are a number of words that could have been used to name this disadvantage; bureaucracy, compliance, rules or regulations. However, it all amounts to the same thing. The ongoing cost to keep your tax exempt status can all be boiled down to “red tape”.  If your organization receives funds from the federal government, you have to spend that money the way your contract requires. They do check.


Depending on the amount of federal funding received and the organizations bottom line, a set of audited financial statements will need to be prepared by a qualified third party accountant. All of the rules, regulations and requirements are provided to you with your federal award. It is worth the time to read and understand that document so that you know what is expected of you.

The last thing a nonprofit organization wants is to have your federal funds recaptured, that is, having to pay back all of the federal funds you were given. No one wants that; so read your grant agreement fully and follow the rules.



Prepared by the Grammarly grammar checker writing team to encourage and educate in the field of non-profit activities in partnership with

If you have a desire for helping others, and are considering starting your own organization, a degree in social justice can help you learn the skills you will need.

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