Reprinted from NEO Law Group.
After a domestic nonprofit takes the first exciting steps of incorporating and filing its Application for Recognition for Exemption (Form 1023) with the IRS, it may be surprised to find out that it may take the IRS six months, or even much longer, to grant the nonprofit its official tax-exempt status.
An organization that is ready to go out and start fundraising and receiving donations to further its mission may not want to wait that long! The good news is, you don’t necessarily have to, however, there are some requirements and risks involved.
First, regardless of whether or not you’ve received tax-exempt status from the IRS, before you start fundraising, you should check with your state’s attorney general (or equivalent charity regulator) office for state-mandated fundraising registration and reporting requirements. Many states require you to register and pay a fee before you’re allowed to solicit in the state.
Next, when fundraising, you must inform your donors that your tax-exempt status is “pending” or “in process,” which means, until you receive from the IRS a favorable determination of your 501(c)(3) status, you cannot state that their donation is tax-deductible. If the nonprofit’s application is timely filed (within its first 27 months) and its exempt status is approved, exemption will be applied retroactively to the date the organization was formed, and, in that case, their donation should qualify as tax-deductible. However, due to our existing tax laws, only about 10 percent of taxpayers itemize deductions and have the ability to take a charitable contribution deduction, and there are other complexities regarding deduction limitations, so you should inform the donor to contact their tax advisor about taking the deduction on their return.
If your tax-exempt status is not approved, the donation received will not be tax-deductible, which may or may not be problematic for the donor. The important thing is to be transparent about your 501(c)(3) status when asking for donations, so donors have a full understanding of the uncertainty surrounding the deductibility of the donation.
For example, your solicitation might state something to the effect of: “[Organization name] is a nonprofit corporation that has filed for IRS recognition of 501(c)(3) status and upon such recognition, which is subject to the IRS’s discretion, your donation will qualify as a deductible charitable contribution to the extent the law provides.”
After receiving a donation that is made prior to the organization’s receipt of a favorable IRS determination, a receipt to the donor might provide similar qualifying language and otherwise meet all of the requirements to allow for the donor to take a charitable contribution deduction (see Charitable Contributions—Written Acknowledgments).
A safer (although potentially more complicated) way to fundraise before receiving exempt status from the IRS could be to fundraise under a Fiscal Sponsor—in this context, a nonprofit organization and 501(c)(3) public charity that can receive donations and grants to support your organization’s charitable mission. Either comprehensive (Model A) or pre-approved grant relationships (Model C) fiscal sponsorship might be used, but this should be carefully reviewed with an attorney with strong experience in this area. You can read more about Fiscal Sponsorship on [NEO Law Group’s] Resource Page.