What is Form 1023-EZ?
Before 2014, to obtain recognition of exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code your non-profit you only had one option and it was to file Form 1023. However, in 2014, the IRS released a short and simple version of the standard 1023 Form for organizations, called Form 1023-EZ. Nonetheless, only certain organizations that meet the seventeen (17) requirements set out by the IRS will qualify to file Form 1023-EZ.
Form 1023-EZ is a three (3) page form that was created for smaller organizations who wish to apply for the federal tax-exempt status. Form 1023-EZ is filed only online, so approval from the IRS comes at a much faster rate. One of the most important requirements when trying to qualify for Form 1023-EZ is having a small organization. The IRS has created an eligibility worksheet that organizations can looked over before applying through Form 1023-EZ. The organization must be small, meaning that the nonprofit’s annual gross receipts cannot exceed $50,000 in any of the following three years after the application is filed, or in the previous three years prior to filing the application. This means that if you have expect your company to exceed $50,000 within the next three years, you should file Form 1023 instead. Additionally, the total assets of your nonprofit, at fair market value, may not exceed $250,000.
Nonprofits must also meet the following requirements to be eligible for Form 1023-EZ:
- Must be formed under the laws of the United States,
- Must have a United States mailing address,
- Must not be a successor to or controlled by an entity suspended for being a terrorist organization,
- Must be organized as a corporation, unincorporated association or trust,
- Must not be formed as a for profit entity,
- Must not be a successor to a for profit entity,
- Must not have previously been revoked or be a successor to a previously revoked organization,
- Must not be recognized as tax exempt under another section of IRC 501(a) or previously exempt under another section of IRC 501(a),
- Must not be a church or a convention or association of churches,
- Must not be a school, college, or university,
- Must not be a hospital or medical research organization or a hospital organization,
- Must not be an agricultural research organization,
- Must not be a cooperative hospital service organization, and
- Must not be a cooperative service organization of operating educational organizations.
What is the Difference Between Form 1023-EZ and Form 1023?
The main difference between Form 1023-EZ and Form 1023 is the information required from the organization and the time for approval. Form 1023 is used by organizations that are bigger and expect to receive more than $50,000 in the following three years. While Form 1023-EZ is three pages, Form 1023 is 26 pages! Form 1023 is much more time consuming for applicants not only because of the 26 pages that they have to complete, but also because Form 1023 has to be mailed to the IRS for review and it can take up to 6 months to receive approval.
What Should an Organization do if it Receives Tax-Exempt Status on Form 1023-EZ but then later its Gross Profits Exceed the Threshold?
If an organization’s gross profits exceed the threshold under Form 1023-EZ, they are not eligible to apply for exemption using form 1023-EZ anymore. Instead, they must apply with Form 1023, which allows your annual gross receipts to exceed $50,000 within 3 years and your nonprofit assets to exceed $250,000. Form 1023 provides the same benefits as Form 1023-EZ as you will still obtain recognition of exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code.
If your organization exceeds the gross profits there is no indication that the IRS would require you to file form 1023, however the IRS has said that it will check applicants of 1023-EZ after they have been operating for a while. Although it is enticing for applicants to file Form 1023-EZ due to its short and simple application, organizations should not take this shortcut if their gross receipts exceed $50,000 as they could lose their exempt status entirely.