Choosing the Right Form for Your Nonprofit Start-Up: 1023 vs. 1023-EZ
Posted by Cathleen Karpik on December 18, 2024
Starting a new 501(c)(3) not-for-profit organization involves many decisions, including which form to use when applying to the IRS for tax-exempt status. There are two options: Form 1023 and the newer, streamlined Form 1023-EZ. Let's explore both.
Traditional Route vs. EZ Way
Many nonprofits still opt for the longer Form 1023 because it is available to every 501(c)(3) organization without restrictions. However, completing Form 1023 requires significant time and money. It spans dozens of pages and comes with lengthy instructions detailing how to fill out the form and the necessary documents. Filing Form 1023 costs $600 and requires setting up a pay.gov account.
Form 1023-EZ, intended for smaller nonprofit organizations, is more cost-effective with a filing fee of $275, payable through pay.gov. It is only three pages long and should take less than half the time to complete compared to Form 1023.
Work the Worksheet
Eligibility for filing Form 1023-EZ is not automatic. You must first complete an eligibility worksheet to verify your organization's qualification. A single "yes" answer can disqualify you from using Form 1023-EZ. For instance, if your organization expects to accumulate annual gross receipts exceeding $50,000 over the next three years, you cannot use Form 1023-EZ. This includes receipts from all sources.
Additionally, if your nonprofit's assets are valued at more than $250,000, you are disqualified from using the EZ form. This includes cash, the fair market value of bank accounts and loans receivable, inventories, bonds, stocks, equipment, and buildings.
Other eligibility requirements include:
- Your organization must be formed in the United States, its states, territories, or possessions; federally recognized Indian tribal or Alaskan native governments; or the District of Columbia.
- It must be organized as a corporation, unincorporated association, or trust.
Ensure you complete the entire worksheet.
Getting Off on the Right Foot
If your organization passes all the tests on the 1023-EZ eligibility worksheet, you should be safe submitting that form. However, if you have any questions or concerns, consult tax and legal professionals. Using Form 1023-EZ if you are ineligible could make your new nonprofit more vulnerable to audits and other IRS scrutiny. It's crucial to start your organization on the right foot!
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Cathy is responsible for engagement management and coordination of services to various exempt organizations. She has experience working with community and private colleges, nonprofit organizations, various governmental entities, and school districts in the areas of auditing, single audits, taxation, information returns, and financial reporting. Cathy has extensive experience with private and community colleges and regularly receives specialized training and updates on federal student financial aid programs by recognized national experts.