What is a 501(c)(3) and How Can It Qualify for Grants and Donations?

Nonprofit charitable organizations play a vital role in supporting communities, advancing education, and providing essential services. To help these organizations maximize their impact, the Internal Revenue Service (IRS) grants 501(c)(3) status, which allows them to operate as tax-exempt entities and qualify for grants and tax-deductible donations.

This designation is a key factor in securing funding and expanding a nonprofit’s reach, as it helps establish financial stability, attract donors, and qualify for grants from government agencies, private foundations, and corporations. Many funders require proof of 501(c)(3) status before awarding grants, making it a necessary step for organizations relying on external support.

Beyond financial benefits, obtaining 501(c)(3) status enhances a nonprofit’s credibility and trustworthiness. Donors are more likely to contribute when their gifts are tax-deductible, and public perception improves when an organization is recognized as a legitimate, tax-exempt entity.

Additionally, 501(c)(3) status provides access to other benefits, such as postal discounts, exemption from state sales tax in certain jurisdictions, and eligibility for nonprofit-specific grants and programs. In this article, we will explore the qualifications for 501(c)(3) tax exemption, the benefits of obtaining this status, and ways this type of org can raise money to support their causes.

What is a 501(c)(3) Organization?

A 501(c)(3) organization is a nonprofit entity that has been granted tax-exempt status by the IRS under Section 501(c)(3) of the Internal Revenue Code. This designation allows qualifying organizations to operate without paying federal income taxes, provided they adhere to IRS regulations and fulfill their stated charitable purpose.

Organizations that qualify for 501(c)(3) status must be established for specific purposes, including charitable, religious, educational, scientific, or literary activities. Other eligible missions include public safety, amateur sports, and the prevention of cruelty to children or animals. These organizations must dedicate their resources exclusively to advancing these purposes rather than benefiting private individuals or stakeholders.

Once approved, a 501(c)(3) tax-exempt organization gains significant financial advantages. Donations made by individuals and businesses to these nonprofits can be deducted from taxable income, encouraging philanthropic giving. Many private foundations, corporations, and government agencies require applicants to have 501(c)(3) status to qualify for grant funding, ensuring that funds are directed toward legitimate charitable activities. This designation not only strengthens a nonprofit’s ability to attract financial support, it also reinforces its credibility and commitment to serving the public good.

How to Obtain 501(c)(3) Status

Establishing a nonprofit and securing 501(c)(3) tax-exempt status requires careful planning and adherence to IRS regulations. The process involves forming a legal entity, preparing governing documents, obtaining an Employer Identification Number (EIN), and submitting an application to the IRS. Each step is important to ensuring compliance and qualifying for tax-exempt benefits.

Form a Nonprofit Corporation

Before applying for 501(c)(3) status, your organization must be legally established as a nonprofit corporation under state law. This process begins with choosing a name that meets state regulations and does not conflict with existing entities.

Next, your organization must file articles of incorporation with the appropriate state agency, typically the Secretary of State. These articles must include specific language required by the IRS, stating that the nonprofit is organized for charitable purposes and that its assets will be dedicated to those purposes if the organization dissolves.

Draft and Adopt Bylaws and Articles of Incorporation

Your nonprofit’s bylaws serve as the foundation for governance and operations. These internal rules define your organization’s structure, decision-making process, and leadership roles. The bylaws should clearly outline the responsibilities of board members, officers, and committees, as well as establish policies for handling conflicts of interest to promote ethical operations. Properly drafted bylaws ensure that your nonprofit functions effectively and remains compliant with legal requirements.

Obtain an Employer Identification Number (EIN)

File Form 1023 or Form 1023-EZ

To receive tax-exempt status, your nonprofit must submit either Form 1023 or Form 1023-EZ to the IRS. Form 1023 is a comprehensive application that requires detailed financial projections, governance information, and descriptions of your organization’s activities. Smaller organizations that meet specific criteria may qualify to file Form 1023-EZ, a simplified application that offers a faster approval process. The application fee varies based on your nonprofit’s projected annual revenue.

Maintaining Compliance to Preserve 501(c)(3) Status

Once you’ve gained 501(c)(3) status for your nonprofit, you’ll want to keep it and that means remaining compliant with all IRS requirements. This includes filing annual reports with the IRS using Form 990, 990-EX, or 990-N, depending on your organization’s revenue size. Failing to file on time can result in penalties and, in some cases, the loss of tax-exempt status, which puts your organization’s fundraising abilities in jeopardy and will necessitate tax payments on revenue generated.

Nonprofits must also operate solely for charitable purposes and avoid activities that could be seen as benefiting private individuals or political candidates. A 501(c)(3) cannot distribute earnings for personal gain or tax-exempt purposes, and any involvement in any lobbying activities to influence legislation or political campaigns must be carefully managed. If advocacy efforts or political activities are part of the organization’s work, they must be structured to align with IRS regulations and limits.

Strong governance and record-keeping help nonprofits meet their compliance requirements. A well-documented board structure, regular meeting minutes, maintenance of public buildings, and oversight of financial operations provide transparency and accountability. Boards should also review financial decisions regularly to prevent misuse of funds.

Internal policies also help nonprofits stay on track. Clear guidelines for fundraising, volunteer management, and data security help organizations manage day-to-day operations responsibly. Well-documented procedures can prevent issues before they arise and demonstrate a commitment to ethical practices.

Finally, your nonprofits should stay informed about federal and state regulations to avoid compliance risks. Laws affecting tax-exempt charitable organizations can change, so ongoing education and proper oversight are necessary.

How a 501(c)(3) Can Qualify for Grants

Grants provide nonprofits with essential funding to expand programs, launch new initiatives, and strengthen their impact within communities. To qualify for grant funding, organizations must meet eligibility criteria and submit well-structured proposals that demonstrate their mission, financial accountability, and measurable outcomes.

Many private foundations, corporations, social welfare groups, and government agencies require applicants to have 501(c)(3) status to ensure they operate with transparency and align with charitable funding requirements. In addition to holding this designation, nonprofits seeking grants should have a well-defined mission, a proven track record of impactful work, and clear financial oversight.

Building a Strong Grant Proposal

A compelling grant proposal increases the likelihood of securing funding by effectively communicating how your organization aligns with the funder’s priorities. A successful application should clearly outline your nonprofit’s mission, goals, and the specific needs the grant will address. Funders want to see how their contributions will drive measurable change, so proposals should include well-defined objectives, expected outcomes, and key performance indicators.

A detailed budget is also essential, demonstrating exactly how the requested funds will be allocated. Granting organizations often favor nonprofits with a history of success, but for newer organizations, a strong leadership team and a well-researched plan can help establish credibility.

Establishing Financial Transparency

Funders want assurance that their contributions will be used responsibly, making financial transparency a key factor in securing grants. Nonprofits should maintain accurate financial records and prepare detailed reports on how funds are used. Regular audits or financial reviews enhance credibility and reassure funders of your organization’s fiscal responsibility.

Additionally, filing IRS Form 990 annually is critical for demonstrating transparency. Though it is a requirement for remaining compliant with 501(c)(3) regulations, grantmakers also often review this form to assess your organization’s financial health and governance practices.

How a 501(c)(3) Can Attract Donations

In addition to grants, nonprofits rely on donations to fund programs, expand services, and fulfill their mission. Attracting and retaining donors requires a combination of financial incentives, strong fundraising efforts, and clear communication about the organization’s impact. By emphasizing tax benefits, building donor trust, and using effective fundraising techniques, 501(c)(3) organizations can create a reliable stream of support.

Tax Deductibility Advantage

One of the most compelling reasons individuals and businesses donate to a 501(c)(3) nonprofit is the ability to deduct contributions from their taxable income. This financial incentive encourages charitable giving while allowing donors to reduce their tax burden.

To help donors take advantage of this benefit, nonprofits should provide IRS-compliant donation receipts that clearly state the contribution amount and confirm its tax-deductible status. Ensuring proper documentation strengthens donor confidence and compliance with tax regulations.

Effective Fundraising Strategies

Nonprofits can attract and retain donors by implementing a variety of fundraising methods tailored to different audiences. Online fundraising through websites, crowdfunding platforms, and social media campaigns broadens outreach and makes donating more accessible. Corporate sponsorships provide an additional funding source, as businesses often contribute through sponsorships, matching gift programs, or in-kind donations.

Establishing a recurring donation program encourages long-term commitment by allowing supporters to make automated monthly contributions, providing a stable revenue stream. Hosting community events such as fundraising dinners, charity auctions, or benefit concerts also strengthens local engagement and increases donor participation.

Building Credibility With Donors

Trust and transparency are essential to donor retention. Nonprofits should regularly share financial reports, impact stories, and testimonials to demonstrate how donations are being used effectively. Keeping donors engaged through newsletters, personalized thank-you messages, and impact updates fosters a sense of connection and appreciation. Showcasing measurable results from donor contributions reassures supporters that their gifts are making a difference.

Using Matching Gift Programs

Many businesses offer matching gift programs, which allow employees to double their contributions through employer-matched donations. Nonprofits can boost participation by encouraging donors to check whether their employer provides this benefit and by promoting matching gift opportunities on donation pages, social media, and fundraising campaigns. Highlighting these programs increases donor engagement and maximizes overall contributions.

Chisholm Law Can Help

Obtaining 501(c)(3) status opens the door to grant funding, tax-deductible donations for federal income tax purposes, and long-term financial stability for religious organizations. Nonprofits that hold this designation are better positioned to receive support from individuals, businesses, public and private foundations, charities, and foundations while remaining exempt from federal income tax.

Maintaining compliance with IRS regulations is just as crucial as securing tax-exempt status. Proper record-keeping, annual filings, and financial oversight help many exempt charitable organizations avoid penalties and continue operating within the law. A well-structured nonprofit can maximize available funding opportunities and build lasting donor relationships.

Setting up your first nonprofit organization and managing ongoing legal requirements can be complex. Organizations must follow specific guidelines when forming their structure, handling finances, and applying for federal tax exemption. That’s why having a clear plan in place from the beginning can prevent challenges in the future – and where legal guidance can help.

Chisholm Law is here to help nonprofits stay on track and avoid mistakes that could threaten their status. Whether your org is just getting started or needs compliance support, the team at Chisholm Law is here to help you with nonprofit formation, 501(c)(3) applications, compliance, grants, donations, and more. Contact Chisholm Law today for support in obtaining and managing your organization’s mission-critical 501(c)(3) status.

*Past results do not determine future outcomes