Online Lesson: Nonprofit Tax-Exempt Status & Funding Options

Lesson Title

Step 7: Obtaining Tax-Exempt Status & Exploring Funding Options

Lesson Overview

At this stage, your nonprofit has completed its foundational documents, including:

• Articles of Incorporation
• Employer Identification Number (EIN)
• Statement of Information
• Bylaws

Now it’s time to focus on funding and tax-exempt status. With so many worthy nonprofit organizations competing for support, raising funds can be challenging without a clear strategy. This lesson introduces common funding options and explains why obtaining 501(c)(3) tax-exempt status is critical for long-term sustainability.

Learning Objectives

By the end of this lesson, participants will be able to:

• Identify common nonprofit funding options
• Explain what 501(c)(3) tax-exempt status is
• Understand the benefits of tax-exempt status
• Distinguish between IRS Form 1023 and Form 1023-EZ
• Understand how to apply for tax exemption online

Nonprofit Funding Options

Nonprofits can raise funds in a variety of ways. While funding sources may differ depending on the organization’s mission and size, common options include (but are not limited to):

• Friends & Family Donations
• Fundraisers and Special Events
• Community Grants
• Private Foundation Grants
• Public (Government) Grants
• Corporate Donations
• Corporate Sponsorships

📌 Successful nonprofits often use a combination of funding sources rather than relying on just one.

Why Tax-Exempt Status Matters

Most grantmakers and funders require a nonprofit to have 501(c)(3) tax-exempt status.

Benefits of 501(c)(3) Tax-Exempt Status

• Exemption from federal income taxes
• Donors can deduct their contributions on their taxes
• Eligibility to receive public and private grants
• Ability to receive tax-deductible:
  
  • Bequests
  • Devises
  • Transfers
  • Gifts
• 
  

Having tax-exempt status increases credibility and makes your organization more attractive to donors and funders.

Applying for 501(c)(3) Tax-Exempt Status

To become tax-exempt, a nonprofit must apply through the Internal Revenue Service (IRS).

There are two application options, depending on the size and structure of your organization:

Form 1023

• Standard application
• More detailed
• Typically used by larger or more complex nonprofits

Form 1023-EZ

• Streamlined application
• Shorter and simpler
• Designed for smaller nonprofits that meet eligibility requirements

How to Apply

• Applications are submitted online
• Filed through the IRS using Pay.gov
• A filing fee is required
• Approval times vary depending on the form filed

📌 Choosing the correct form is critical to avoid delays or rejection.

Document Familiarity

Below is:

• A sample eligibility checklist to determine whether to file Form 1023 or Form 1023-EZ
• A sample copy of Form 1023-EZ for familiarity

📝 Important: These samples are for reference only. Applications are completed and submitted electronically through irs website

Key Takeaways

• Funding is essential for nonprofit sustainability
• Most grants require 501(c)(3) tax-exempt status
• Tax exemption benefits both the nonprofit and its donors
• The IRS offers two application options: 1023 and 1023-EZ
• Applications are filed online through Pay.gov

Next Step

Once your tax-exempt status is approved, your nonprofit can:

• Actively pursue grants
• Launch fundraising campaigns
• Build corporate partnerships
• Expand programs and services