What is the status of a nonprofit corporation while awaiting tax exemption?

I work with a lot of nonprofit corporations. I help them with all aspects of their “life-cycle.” One of the areas of greatest confusion is the status of a nonprofit corporation while it is awaiting a decision by the IRS as to whether to grant the entity “tax-exempt status.” Applications to the IRS for tax-exempt status are generally made on Form 1023. The instructions to the Form 1023 provide

“When to File

Generally, if you file Form 1023 within 27 months after the end of the month in which you were legally formed, and we approve the application, the legal date of formation will be the effective date of your exempt status.

If you don’t file Form 1023 within 27 months of formation, the effective date of your exempt status will be the date you filed Form 1023 (submission date). The date considered to be the date we receive Form 1023 is generally the postmark date. For exceptions and special rules, including automatic extensions, see Schedule E of Form 1023.”

Thus, the IRS itself contemplates that many applicants will experience considerable gaps between when they are formed (i. e., the date Articles of Incorporation are FILED) and the date when the applicant files a Form 1023 (possibly 27 months – or even longer). Furthermore, the IRS currently advises that it can take from 2 to 13 months to process a Form 1023 from the date it is received by the IRS. Thus, adding 13 months of processing time to a hypothetical 27-month gap between the filing of the applicant’s nonprofit Articles of Incorporation and the mailing of its Form 1023 to the IRS, you get 40 months – or more than three years during which period a nonprofit has not yet received notice that it has been granted tax exemption. So, what goes on during these 3-plus years? The answer is, “lots.”

I want to pause here to articulate a distinction. During this 3-plus year period, a corporation can be a nonprofit entity AT THE STATE LEVEL, while it is awaiting the granting of “tax-exempt status” AT THE FEDERAL LEVEL. So, as you can see, these are two separate tracks. For many clients, this is a kind of nebulous area. The following are some of the more basic compliance requirements.

Compliance Requirement: The state of California requires every California nonprofit to file a Statement of Information with the California Secretary of State, within 90 days of registering with the California Secretary of State, and every two years thereafter during a specific 6-month filing period based on the original registration date. Changes to information contained in a previously filed Statement of Information can be made by filing a new Form SI-100, completed in its entirety.

Compliance Requirement: Every charitable corporation must register with the California Attorney General’s Registry of Charitable Trusts within 30 days after it initially receives property. Property includes more than just money, such as supplies, food, clothing, real property, stocks and bonds, and other tangible gifts. Thus, even if the charity has no money, if it has charitable “property,” it must file a CT-1 Form to register with the Registry, and do so within 30 days of the property’s receipt. Thereafter, it must annually file a RRF-1 Form with the Registry.

Compliance Requirement: In general, an organization that claims tax-exempt status, but has not yet received an IRS letter recognizing exempt status, is generally required to file an annual exempt organization return. If an annual return is due before the organization has submitted its application or while the organization's application for recognition of exempt status is pending (including any appeal of a proposed adverse determination), the organization must file the return. The applicant will need to indicate that exempt status is not yet recognized by checking the appropriate box. Like other exempt organization annual returns, a return filed before exempt status is recognized is subject to public disclosure. If an organization has unrelated business income of more than $1,000, it must also file Form 990-T, Exempt Organization Business Income Tax Return.