Incorporator The Journal of U.S. Formation
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Editorial 7 MIN READ

The nonprofit stack: state first, then the IRS

Why the 501(c)(3) letter is a separate filing from the corporation, and what happens when founders skip the second one

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 7 sections
  1. Track one: the state filing
  2. Track two: the federal determination
  3. The 27-month relation-back rule
  4. The third and fourth filings
  5. Annual compliance
  6. Where founders lose the thread
  7. Sources

nonprofit corporation and a 501(c)(3) charity are two different filings, made to two different governments, with two different fees. Founders who confuse them spend their first year collecting donations that are not technically deductible.

The state incorporation gives you a legal entity that can hold a lease, open a bank account, and limit the board's personal liability. The IRS determination letter makes contributions to that entity deductible under IRC § 170 and exempts the entity from federal income tax under IRC § 501(a). Neither filing does the other's job.

Track one: the state filing

Every nonprofit corporation is a creature of state law first. You pick a state, file articles of incorporation under that state's nonprofit statute, and draft those articles so the IRS will later accept them. The second part is where most first-time filers go off the rails, because the state does not require 501(c)(3) language; the IRS does.

Four common domiciles and their nonprofit statutes:

  • Delaware. The General Corporation Law governs nonstock corporations through 8 Del. C. § 114. The certificate of incorporation fee is $89.
  • New York. The Not-for-Profit Corporation Law (N-PCL) governs. The Department of State charges $75 and will want you to identify the N-PCL Type (A, B, C, or D).
  • Texas. Chapter 22 of the Business Organizations Code governs. Form 202 is a two-page Certificate of Formation. The fee is $25.
  • California. Corporations Code Division 2, Title 1 governs. Articles of Incorporation (Form ARTS-PB-501(c)(3) for a public benefit corporation seeking federal exemption) carry a $30 fee.

None of these fees is the problem. The problem is the language inside the articles. To qualify for 501(c)(3), the articles must limit the corporation's purposes to one or more exempt purposes (charitable, educational, religious, scientific, literary), must not permit non-exempt activities, must prohibit private inurement to officers or directors, and must contain a dissolution clause that distributes remaining assets to another 501(c)(3) or to a government for public purpose. The IRS publishes sample provisions in the Form 1023 instructions. State filing clerks will accept articles without this language; the IRS will not.

Track two: the federal determination

Once the state issues the certificate, the organization applies to the IRS for recognition of exemption. Two forms exist.

Form 1023 is the long version: roughly twenty pages before schedules, a three-year financial projection, a narrative of activities, detail on compensation and conflicts of interest, and copies of articles and bylaws. The user fee is $600, set annually by the first revenue procedure of the year (Rev. Proc. 2022-5 is current and carries the same $600 figure as Rev. Proc. 2021-5).

Form 1023-EZ is the short version, introduced in 2014 to clear a backlog that had exceeded 60,000 pending applications. Three pages, filed online through Pay.gov, $275 user fee. Eligibility is restricted: the applicant must project annual gross receipts of $50,000 or less for the current and next two years, project assets of $250,000 or less, and not be a church, school, hospital, or one of a dozen other excluded categories. An Eligibility Worksheet runs thirty questions and a single "yes" on most of them disqualifies you.

Timing in 2022. A clean 1023-EZ is often approved in two to four weeks. The IRS states that 80% of determinations across both forms are issued within 191 days, a useful anchor for the full 1023. Full 1023 applications run six to twelve months and sometimes longer; the post-COVID backlog stretched those numbers through 2020 and 2021 and had not fully cleared by early 2022.

The 27-month relation-back rule

The order matters because the IRS will backdate the determination letter's effective date to the date of state formation, but only if the application is filed in time.

IRC § 508(a) requires notice to the IRS. Treas. Reg. § 1.508-1(a)(2) sets the clock at fifteen months from the end of the month of formation, with an automatic twelve-month extension, for an effective window of twenty-seven months. File within that window and the determination relates back to the state formation date; donations the organization accepted during the gap are deductible as if exemption had been in place the whole time.

Miss the window and the default effective date becomes the Form 1023 submission date. Retroactive relief is available under Treas. Reg. § 301.9100-3 on a showing of reasonable action and good faith, but it is discretionary, and it is not available on Form 1023-EZ except by filing the full 1023. A donation made during the gap year of an organization that never applies, or applies too late and does not get relief, is not deductible to the donor.

Rev. Proc. 2018-15 is the adjacent guidance that founders sometimes conflate with the 27-month rule. It provides that a 501(c) organization which restructures (reincorporates in another state, converts form, merges into a new corporation) generally does not need to file a new Form 1023 if purposes, activities, and organizing language are substantively continuous. Useful for a state-to-state move. Not a cure for a missed initial filing.

The third and fourth filings

Federal recognition does not automatically exempt the organization from state income or franchise tax. California is the sharpest example. The Franchise Tax Board requires either Form 3500 (a long-form application with a $25 fee) or Form 3500A, a short submission that piggybacks on the IRS determination letter. An organization that forms in California and obtains federal recognition but never files 3500A remains on the hook for the $800 minimum franchise tax under Cal. Rev. & Tax. Code § 23153. New York uses Form CT-247 with the Department of Taxation and Finance; without it on file, the Department assesses the corporation franchise tax as if the entity were a business corporation.

Then comes the fourth filing. Roughly forty states require a charitable solicitation registration before an organization can ask residents of that state for money. California uses Form CT-1 for initial registration with the Attorney General's Registry of Charitable Trusts, with an annual Form RRF-1 renewal. New York requires CHAR410 initial and CHAR500 annual to the Charities Bureau. The Unified Registration Statement (URS) was an attempt, starting in the late 1990s, to produce a single form that most registration states would accept. Adoption has receded; by 2022 only a minority of states still accept it and fewer accept it for renewals. The URS has not been updated since 2014.

Annual compliance

Federal annual filing under IRC § 6033 depends on gross receipts. Form 990-N (the e-postcard) if gross receipts are normally $50,000 or less; Form 990-EZ if under $200,000 gross and $500,000 in year-end assets; full Form 990 above those thresholds; Form 990-PF for private foundations regardless of size. Missing three consecutive annual filings triggers automatic revocation under § 6033(j), with reinstatement available under Rev. Proc. 2014-11. Auto-revocation is a shockingly common failure mode for volunteer-run organizations; the IRS publishes a monthly list that runs into the thousands.

Where founders lose the thread

The pattern repeats. A founder files the Delaware nonstock incorporation in January, puts a PayPal button on a website in March, collects $18,000 from well-meaning donors over the summer, and gets around to Form 1023 in November. If the application is filed inside the 27-month window, the determination back-dates and the donations convert to deductible; donors can claim them for the year of the gift. If the founder procrastinates past the window, or files Form 1023-EZ and does not qualify for the retroactive category, those summer donations are not deductible, and the fix is a full 1023 with a Reg. § 301.9100-3 request and no guarantee.

The cheaper mistake is worse: thinking the state incorporation alone makes the organization "a nonprofit." It does in the corporate-law sense. It does not in any sense that matters to a donor's CPA.

The filing order, in one line: state incorporation with IRS-compliant articles, EIN, Form 1023 or 1023-EZ within twenty-seven months, state tax exemption, fundraising registration in each state solicited, then annual 990 and state reports for as long as the organization exists.

Sources

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