Here’s what you need to know about all the 501(c)(3) application process Via ForbesAdvisor
What Does 501 Status Mean?
The 501 status means that the corporation is exempt from paying federal taxes on revenues and income generated in the organization. It does not exempt the organization from filing tax returns. You must still fileA 501 works like most other C corporations. The main difference is that the financial data of a 501 is subject to public review, whereas a private organization is able to maintain its books without this type of potential scrutiny.
It’s important to remember that the nonprofit is fundamentally a corporation, trust, LLC or unincorporated association and must follow the organizational rules of the underlying business entity. For example, with a corporation, you’ll have articles of incorporation with bylaws that dictate how you run your organization. A board of directors is elected to oversee the company’s operations. The nonprofit can hire people and pay them a salary and benefits from revenues generated.
While the IRS says that 501 nonprofit organizations can pay employees a “reasonable salary,” it doesn’t give a definitive set of parameters. But if the IRS, in reviewing the annual tax filing, feels that the status is just a tax shelter for a profit organization paying inflated salaries, it could revoke the status.The primary thing that an organization needs to do to maintain its 501 nonprofit status is to do the annual filing.
Aside from filing the annual tax forms, the organization should avoid engaging in activities that could jeopardize the tax-exempt status. Activities that should be avoided include:Lobbying as a substantial part of its regular activitiesNot filing a return for three consecutive yearsis only allowed minimum levels of unrelated business activities.
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