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Breaking Down the Form 1023-EZ

The 1023-EZ form is used to apply for a tax exempt status for your nonprofit, it is also needed for your 501c3 application and various administrative tasks on the state and federal level. 

While this process can often provoke a headache, once you have completed it, you are one step closer to opening your doors and changing lives!  

To make your life a little easier, we have broken down the process of filing the 1023-EZ line by line. We will cover all of the form sections as well how to tell if your organization is eligible for the EZ format:

Let’s get started!

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1023 vs 1023-EZ

There are two different types of the 1023 form and knowing the difference between them can be a real time-saver during the filing process. The 1023 is the original document that is most commonly used as there are no restrictions for those who can use it. The 1023-EZ is a shorter version that only some nonprofits qualify to use. Here are all of the details:

Form 1023: This form is 40 pages long and costs $600 to file with the IRS. The IRS provides detailed instructions on how to fill it out, as well as information on extraneous filing fees, deadlines, as well as any documents needed to accompany your application. 

We highly suggest you do your homework (aka, a needs assessment and business plan) before tackling a form of this size, as you will need key elements of those exercises to correctly fill out the application. 

Pro Tip: As this is one of the key steps in founding your nonprofit, always have a lawyer specialized in tax-exempt organizations look over your application before sending. This will avoid unnecessary back-and-forth with the government office and save time in the long-run.

Form 1023-EZ: This form is only three pages long and costs $275 to file. While this is an excellent option, in order to qualify, your organization must fit a number of specific criteria (more on that below). You can only file the EZ version online. If your organization qualifies for the 1023-EZ, we highly recommend that you use this service. 

The response time is cut down by half, but because it’s kind of like the Turbo Tax for nonprofit registration, you can expect some audits down the road to make sure you are 100% compliant. 

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Eligibility Worksheet

As previously mentioned, there are certain restrictions to qualifying for the 1023-EZ form. Prior to filling out the online form, you must first fill out the eligibility worksheet to verify that you fit all of the criteria for the streamlined service. 

The worksheet has 30 questions, and if you answer yes to any of them, then you are not eligible for the 1023-EZ form. 

The major restrictions to keep in mind are that your organization cannot:

  • Have annual gross receipts that exceed $50,000 for the next three years. For a refresher of accounting 101, gross receipts are the total amounts the organization has received from all sources during your annual accounting period.

  • Have total assets that exceed $250,000 in fair market value. Your total assets include things like: cash, accounts receivable, inventories, bonds, corporate stocks, loans receivable, land, buildings, and equipment. 

  • Be an organization formed outside of the United States. US territories like Puerto Rico or the Virgin Islands are still considered valid. 

  • Be an organization that is a successor, or controlled by an entity supposed under the 501(p). Don’t worry, we had to look this up too. All this says is that your organization cannot be involved in any way with:  terrorist organizations, organizations participating in terrorist activity or those who have had their tax-exempt status revoked and/or suspended. 

  • Be organized as any other entity besides a corporation, unincorporated, association or trust. If you are registered as an LLC, you are not eligible for the 1023-EZ. 

  • Be a for-profit entity. I mean, kind of a no-brainer there.  

  • Be a successor to a for-profit entity. If you have taken over the assets of a for-profit, have been converted/merged from a for-profit or have appointed the same officers, directors or trustees, you do not fit the EZ form criteria. 

  • Have been a previously revoked or a successor to a previously revoked organization. 

  • If you are currently recognized or as tax exempt under another section of the IRC. This mainly includes being tax exempt under the 501(a) or if you have been previously except under the 501(a) before. 

  • If your organization is a church, school, college, university, hospital, medical research association, agricultural research organization, health maintenance organization, or an accountable care organization. 

  • If you are applying for tax exemption under the 501(e), 501(f) or 501(n). This means if you are asking for exemption as a hospital service organization, cooperative service organization of operating educational organizations, or as a qualified charitable risk pool. Because these types of organizations are applying for another type of exemption, they must pass by the long form 1023.  

  • Maintain one or more donor advised funds. A donor advised fund is kind of like a personal savings account for charity. The donor creates an account and donates funds, stock, assets like land, buildings, artwork and can get an immediate tax deduction for doing so. This account is controlled and managed by the nonprofit. 

  • Be a private operating foundation. A private operating foundation engages directly in charitable acts versus providing grants to other organizations. If you are requesting classification for this type of foundation, you must pass by the long form 1023.

While we have broken down the major criteria, we highly suggest that you carefully read-through the eligibility worksheet and consult a lawyer if you have any questions. 

If your organization has answered no to all of the questions, you are ready to dive into the 1023-EZ form and get the ball rolling toward success!

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Part 1: Identification of Applicant 

This is arguably the easiest section and asks for the basic information about your organization. In order to make this section go faster, you should have already chosen your organization’s name, board members, office location and website

Let’s go line by line:

  • Line 1a. Full name of organization. This name should be the same as it appears on all official documents. Avoid abbreviations and standardize accents or punctuation if you have any. 

  • Line(s) 1b-e. Mailing address. Your postal mailing address goes here. If you don’t have a proper street address, you can use a P.O. box number instead.

  • Line 2. Employer Identification Number (EIN). You cannot fill out this form without your EIN and you are required to have it regardless if you have employees are not. If you have skipped this step, don’t worry! Click here to apply. 

  • Line 3. Month tax year ends. You can choose any 12-month accounting period you like within your organization, as long as you comply with all accounting requirements and declare them to the IRS. This line is dedicated to communicating to the federal government how your accounting operations will work and during what time, keeping in mind that your first tax year can be less than 12 months depending on when you registered. The accounting period should be included in your bylaws. Small reminder to use a two-number format for the month, for example, 01 for January. 

  • Line 4. Person to contact if more information is needed. This person could be a board member, director, trustee or even an “authorized representative,”  aka, an attorney or accountant that is deeply involved with your organization. 

  • Line(s) 5-6. Contact phone & fax number. This is standard, complementary information to the additional contact. Be careful, they are not asking for the contact information for your organization, but only for the person you indicated on line 4. 

  • Line 7. User fee submitted. The user fee associated with the 1023-EZ form is $275 and must be paid online when the application is filed. 

  • Line 8. List the names, titles & mailing addresses of your officers, directors, and/or trustees. If you don’t have a postal address for each member, you can list the organization’s address for the postal address if need be. As there is only space for five members, if you have more than five to list you must limit them to this order: 
    • President/CEO/COO
    • Treasurer or CFO
    • Any officers/directors/trustees who are the most substantial contributors
    • Any officers/directors/trustees who are related to a substantial contributor
    • Voting members of the organization
    • Officers: positions such as president, vice president, secretary, board chair 

Please note that you cannot note the same person twice, therefore if your CEO is also the largest contributor, then you must take the second largest contributor. Last but not least, if the same person holds different positions (ex: CEO & CFO), list this person on one line and note all of their roles.  

  • Line 9a. Organization’s website. Enter your website URL as is the date that you fill in the application. Of course, if you don’t have a website (yet!) you can fill in this section with “N/A.”

  •  Line 9b. Organization’s email. The IRS cannot send confidential information via email (like the status of your application) but this contact is mainly used for the sending of educational information or best practices for compliance.

See? That was a breeze. Now that we have the basics down, we are ready to move to Part 2. 

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Part 2: Organizational Structure

While only seven lines to fill in, this is where the language can get a bit technical. This section boils down to the nitty gritty of how your organization is structured either as a corporation, an unincorporated association or a trust and what must be included in your organizing document. The filing rules differ slightly with each entity type but don’t worry, we are going to break it down for you. 

  • Line 1. Entity Type. As stated above, only certain types of corporations, unincorporated associations and trusts are eligible for a tax-exempt status as a 501(c)(3). For reminder:

    • Corporation: Entity organized under a federal or state statute and the organizing document is generally the articles of incorporation. This is the most common entity for nonprofit organizations.

    • Unincorporated associations:  Formed under state law and must have two or more people joined by mutual consent for a common lawful purpose. A good example of this is a group of neighbors coming together to raise funds to support a family in a time of need. An entity of this type must file a 1023 (either long form or EZ) if they have over $5,000 in revenue. 

    • Trust: Formed through a trust agreement, declaration of trust or formed through a will. 

Check the box with your organization’s entity type. 

  • Line 2. Necessary organizing document. 
    • Corporation: Articles of incorporation that has been filed and approved by the state you are operating in. 

    • Unincorporated association: A “necessary organizing document” for this entity type, your articles of organization must include your name, purpose(s), the date the document was enacted and the signatures of at least two people. Your bylaws may act as this document if it includes all of the above information. 

    • Trust: Your trust agreement or declaration of trust can be considered as an organizing document as long it includes the appropriate signatures and the precise date of formation. 

  • Line 3.  Formation Date.
    • Corporation: The date of when the state filed your articles of incorporation. 

    • Unincorporated association: The date your organizing document was approved by the signatures of at least two members of your organization.
       
    • Trust: If your trust was not formed by a will and does not provide for distributions to non-charitable interests, you enter the date the trust was funded. If it does provide for non-charitable interests, enter the date of when these interests expired. Be careful, if they are not expired, then you cannot apply for tax exemption. If you were formed via a will, enter the date of death of the testator or the date the non-charitable interests expired, whichever the later date is.

  • Line 4. State of Formation. Enter the state or locally recognized tribal government where you were incorporated. Remember, this might not be where your organization is physically located but where you legally registered and formed your organization.

  • Line 5. Purpose(s) clause. As simple as it sounds, all you have to do is to check the box that your organizing document contains a purpose clause. That means that it must limit your purpose to those few defined by the 501(c)(3) section: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. Be careful here, if your organizing document (i.e. articles of incorporation) defines a purpose larger than those defined by the 501(c)(3), the IRS recommends amending it before filing the 1023. 

    • In the 1023-EZ filing instructions, the IRS gives an example of a perfect purpose clause: “The organization is organized exclusively for charitable, religious, educational and scientific purposes under section 501(c)(3) of the Internal Revenue Code, or corresponding section for any future federal tax code.” 

  • Line 6. Activities not in furtherance of tax-exempt purposes. This checkbox states that your organizing document does not promote any activities that are outside of the scope of the 501(c)(3) restrictions. For example, making sure that your organization will not benefit private shareholders or private interests of any kind, attempt to sway legislation or participate in any political campaigns. 

    • Here is an example clause from the IRS : "No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes described in section 501(c)(3). No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code."
  • Line 7. Dissolution clause. This checkbox verifies that you have included a dissolution clause in your organizing document. This clause answers the question of where your assets go if you dissolve your organization one day. In order to have a tax-exempt status, your assets must be dedicated to a 501(c)(3) purpose. Some states allow for distribution of assets upon dissolution, so check with your local authority or a qualified attorney for the proper language to put into your organizing document. 

    • An example of a dissolution clause from the IRS: "Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose."

Great job! This is one of the toughest sections to get through. If you have any questions about the correct formulation of your clauses or a revision of your organizing document, seek a lawyer or legal aid center to review this section for you.

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Part 3: Your Specific Activities

As Corrine Bailey Ray says, it’s time to let your hair down! We have gotten to the fun part where you get to discuss your mission, potential programs and activities.  

  • Line 1. Briefly describe your mission or most significant activities. You are limited to 255 characters here so this is a great time to recycle the content of your mission statement to be more specific to each activity that you plan on carrying out. A few helpful tips:
    • Make sure you are describing activities related only to the 501(c)(3) purposes
    • Verify that you are not repeating your organization's purpose in your organizational document, you should be focused on each individual activity 
    • Avoid speculating about potential (future) programs 

Here an example from the IRS: "In Rev. Rul. 74-194, 1974-1 C.B. 129, an organization formed to prevent cruelty to animals by subsidizing spaying and neutering for pet owners who otherwise couldn’t afford the services, qualified for the exemption under section 501(c)(3) as an organization formed and operated exclusively for the prevention of cruelty to animals."

  • Line 2. National Taxonomy of Exempt Entities (NTEE) code. The NTEE code is a series of letters and numbers that classify an organization’s general purpose. Pick the code that most closely resembles your mission and purpose. You can find the full list here.

    • Pro tip: The NTEE classification is widely used, not just for administrative purposes but for larger subjects like grant applications, fundraising, even communication. Getting familiar with this list will be a time-saver for future operations.

  • Line 3. Exempt Purposes. As discussed above, in order to qualify for tax exemption, your purpose must be uniquely within the 501(c)(3) defined purposes. Check all of the boxes that apply. If you have a doubt, here is a more in depth breakdown of each category:

    • Charitable: Relief to the poor, distressed or underprivileged, advancement of religion, advancement of education or science, erecting or maintaining public buildings, monuments or works, eliminating prejudice and discrimination, defending human and civil rights, combating community detioriation. 

    • Religious: The IRS gives two guidelines to determine validity, one being sincerity of the beliefs and the other that the practices and rituals are not illegal or contrary to public policy.

    • Educational: The instruction or training of the individual for the purpose of developing their capabilities and includes childcare away from the home if the services are available to the general public and enables the parents to be gainfully employed. 

    • Scientific: Must be organized and operated in the public interest. Research must be made public and available to the general population on a nondiscriminatory basis or is performed for the United States. 

    • Testing for public safety: Testing of consumer products to determine if they are safe for the general public.

    • To foster national or international amateur sports competition: There are two types of amateur athletic organizations, ones that foster competition whose activities do not provide any athletic facilities or equipment and the other can provide equipment. 

    • Prevention of cruelty to children or animals: Examples are preventing children from working in hazardous occupations, promoting higher standards of care for lab animals or funds to prevent over-breeding. 

  • Line 4: Prohibited or restricted activities. You must formally attest that you will not participate in any of the following activities in order to comply with a tax-exempt status:

    • Refrain from supporting or opposing candidates in political campaigns. This includes at the local, state and federal level. Going beyond simple financial endorsements, as a tax exempt entity you cannot contribute, in a verbal or written form, public statements of position on behalf of your organization, nor distribute statements prepared by a third party that favor or oppose a political campaign. 

    • Ensure that net earnings are not distributed in whole or in part to the benefit of private shareholders or individuals. 

    • Not further non-exempt purposes.

    • Not be organized or operated for the primary purpose of conducting a trade or business that is unrelated to exempt purpose(s). Aka, the income coming from the selling of goods or services unrelated to your exemption purposes.

    • Not devote more than an insubstantial part of activities to attempting to influence legislation. This includes actions by Congress, state legislature, any local council or governing body. 

    •  Not provide commercial-type insurance as a substantial part of activities. 

  • Line 5: Attempting to influence legislation. If you want to check "Yes" the IRS suggests to file the 5768 form instead of the 1023. 

  • Line 6: Compensation to officers, directors or trustees. This section asks you if you are going to compensate your senior members in any way via a salary, deferred compensation, retirement benefits, fringe benefits (like a company car or travel benefits) or bonuses. Check "Yes" if so, "No" if not. 

  • Line 7: Donation of funds or payment of expenses to individuals. As simple as it sounds, check “Yes”  if you have or planned to donate funds or paid expenses for individuals to plan to do so in the future. 

  • Line 8: Conducting activities or providing grants outside the United States. Check “Yes” if you plan on any activities outside of the United States or plan to provide grants, aid to individuals or organizations outside of the country. The United States also includes all of its territories (heeeyy, Puerto Rico). 

  • Line 9: Financial transactions with officers, directors, or trustees. Tick “Yes” if you have or plan to engage in any financial transactions (like loans, grants, payments for goods or services, rent) with any of your offices, directors, trustees or any entities they own or control. 

  • Line 10: Unrelated business gross income. Tick “Yes” if you have received or plan on receiving $1,000 (or more) in business gross income during a tax year. If you do, no problem, you just fill out the 990-T form with your tax return as you may be liable for paying tax on this extra revenue. 

  • Line 11: Gaming activities. Bingo! Tick “Yes” if you have or plan on conducting bingo or any other gaming activities. (Yes, it is random, yes, we double checked it).

  • Line 12: Disaster relief assistance. Check “Yes” or “No” if you plan on providing disaster relief. This is asked because as a tax-exempt organization, you cannot provide assistance to only one person or a few individuals (three people injured in a disaster for example) as your purpose must serve a charitable class. 

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Part 4: Foundation Classification

Part four is designed to help the IRS classify your organization as either a private foundation or public charity. A public charity has a large base of support while a private foundation receives their support via a small number of donors. 

This classification is extremely important as it determines which tax rules your organization must abide by and the limitations imposed on your donors contributions. 

The language can be a bit tricky here, so let’s break it down into simpler terms. 

  • Line 1. Recognition as a church, school or hospital. If you remember from the beginning of the article, one of the criteria of the eligibility worksheet was that if your organization is classified as one of these three categories, you do not qualify for the streamlined process, and must fill out the long form 1023. 

  • Line 2a. Support from public sources. Check this box only after completing steps 1-7 (below). Part of having a public charity status means that you receive at least one-third, or over 10%, of your support from public sources. This is called the 509(a)(1) support test. To calculate this correctly, the IRS suggests that you combine your revenues for the most recent 5-year period. If you are a new organization, then base your calculation on the revenues you have actually received so far and any revenue you anticipate receiving over the first 5-years of existence. 

    • The IRS gives a great example here: "If the amount in Step 1 is $150,000, the 2% threshold is $3,000. If, over the 5-year period, one individual donor gave $4,000, another individual donor gave $3,250, and the rest of the donors gave $3,000 or less, the amount calculated for Step 3 will be $1,250, which is ($4,000 minus $3,000) plus ($3,250 minus $3,000)."

    • Step 1: Add all gifts, grants and contributions, including government funds and funds coming from public charities. Do not include any exempt-activity or unusual grants. 

    • Step 2: Multiply the amount from Step 1 by 2% (0.02). This is your 2% threshold amount. Gifts, grants or individual donations from those other than government units and public charities cannot exceed 2%.  

    • Step 3: Excluding any contributions you calculated already above (gifts, grants, donations from anyone other than the government or a public charity), add together any donations from any person that exceed the 2% threshold amount calculated above (in step 2).

    • Step 4:  Subtract the amount calculated in step 3 from the amount in step 1. This is now our 509(a)(9) public support amount. 

    • Step 5: Calculate the total of your unrelated trade or business revenue, as well as investment income. 

    • Step 6: Add the amount from step 1 to the sum of step 5. This is your 509(a)(1) total support amount. 

    • Step 7: Divide the total of step 4 by the total amount of step 6. If the result is at least 33 ⅓ % check the box on line 2a.  If the result is between 33 ⅓ %-10%, check the box on line 2a but know that you will be required to organize and operate your nonprofit in a way that will generate new resources (public or governmental support) on a continued basis. The IRS takes three criteria in mind when determining if your organization is organized to do do so: that a significant percentage of financial support you receive comes from the general public, governmental units or public charities, if you receive support from a large number of people, and if your activities are likely to appeal to a broad common interest. 

  • Line 2b. Gifts, grants and membership fees.  Check this box only if you did not check line 2a and you meet the requirements (below) for the 509(a)(2) support test. 

    • Step 1: Add together the sum you have received in the form of taxes levied on your behalf and the value of services and facilities given by a governmental unit. 

    • Step 2: Add all gifts, grants, donations and any exempt-activity revenue from all sources not taken into account in step 1. 

    • Step  3: To the sum calculated in steps 1 and 2, add investment income and all revenue coming from unrelated activities. This is your 509(a)(2) total support amount. 

    • Step 4: Calculate the total contributions received from disqualified persons. To find out who counts as a disqualified person, check out the list on page 9 of the 1023-EZ instructions

    • Step 5: Calculate the total of exempt-activity revenues from disqualified persons.
       
    • Step 6: Calculate the revenues (outside of disqualified persons) received from exempt-activity that exceed 1% or $5,000 on a year-by-year basis. Total the amounts that exceed the $5,000 threshold. 

    • Step 7: Subtract the amounts calculated in step 4, 5 and 6 from the amount in step 2. Then, add that amount to the sum of step 1. This is your 509(a)(2) public support amount. 

    • Step 8: Divide the sum in step 7 by the sum of step 3. If the result is less than 33 ⅓ % then do not check the box in line 2a. If it is at least 33 ⅓ % then proceed to step 9 as you have qualified for the first part of the 509(a)(2) support test. 

    • Step 9: Add together your investment income and revenues from unrelated activities then divide it by the sum in step 3. If the amount is less than 33 ⅓ % then you qualify for the second part of the 509(a)(2) support test. 

If the result of step 8 is at least  33 ⅓ % and less than in step 9, check the box on line 2a.

  • Line 2c. College or university owned by a government unit. In order to tick the bow for line 2c, you must satisfy the same public support test as line 2a. Tick the box if you do and also meet  the following criteria:
    • An agency or instrumentality of a state or political subdivision
    • Owned and operated by a date or political subdivision
    • Owned and operated by an agency or one or more states or political subdivisions

  • Line 3. Private foundation. If you have not checked any of the boxes above, then you are a private foundation and must attest to the IRS that your organizing document (i.e. articles of incorporation) contain the necessary provisions required by section 508(e). You can find that information here, on page 30.

We can officially say that the hard part is over! Sections 1-4 are the most time consuming of the 1023-EZ and now we can move onto the final two sections: reinstatement after automatic revocation and the cherry on top, the signature. 

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Part 5: Reinstatement After Automatic Revocation

You only need to fill out this section if you have previously had your tax exempt status revoked because of a failure to file tax returns for over three years. You only need to check one of the two boxes here. 

  • Line 1. Section 4 of Rev. Proc. 2014-11. Don’t let the official lettering scare you, all this box is saying is that you admit that you failed to file your 990 for three consecutive years, this is the first time that you have been revoked and that you are submitting this application no more than 15 months after the date on your revocation letter.

  • Line 2. Section 7 of the Rev. Proc. 2014-11. Check this box if you are seeking reinstatement under section 7 of the Rev. Proc. 2014-11 (page 6). By checking this box, you agree to reinstatement as of the filing date of this application. 

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Part 6: Signature

Congratulations! You made it this far and the best was left for last. The signature must be done by the officer, director or trustee noted in part 1, line 8.

As previously stated, before formally submitting your application for tax-exemption, we highly suggest that you have the details looked over by a licensed attorney. While the 1023-EZ is a streamlined service and far less detailed than the long form 1023, you are still declaring complex and confidential information to the IRS that can affect the future of your organization.

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We hope this article helped you in filing your 1023-EZ form! Let us know in the comments if you have any questions about the process, and we can connect you with an expert resource to help. 

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