You know how they say you need to dress for the job you want rather than the job you have? In much the same way, this is true for pursuing non-profit status.
A few years back Ellis Carter listed the top five mistakes people make when creating a non-profit organization. Among the mistakes were familiar topics like not copying another organization’s bylaws; using your state template for incorporation (doesn’t have the info the IRS wants); and misclassifying employees as independent contractors.
A topic that doesn’t come up as frequently is the necessity to act like a non-profit even if the IRS hasn’t granted you tax-exempt status.
Failing to File 990s for Start-up Period. Sometimes nonprofit founders don’t realize that to gain tax-exempt status, they have to act like a nonprofit from the day they are incorporated. This means a 990 must be filed for the start-up year even if it’s a short year and even if there is zero revenue. Most start-ups will be able to file the simplified 990-N their first year if they have brought in revenue of $50,000 or less. Failure to file 990s for three years will result in automatic revocation of tax-exempt status. This means if you don’t file 990s while you are waiting for tax-exempt status, the IRS may revoke an exemption immediately upon granting it.
If you consider the implications of this, it means you need to follow all the regulations governing non-profits from day one. There can’t be any occurrence of private benefit or inurement that you intend to cease upon getting tax exempt status.
For example, if you opened an acting school with the intent of living off the proceeds, saw it wasn’t making money and decided to incorporate as a non-profit with family members as officers and making no significant changes to operations, that could be problematic.
While that is a fairly clear example of intent to abuse the tax-exempt status, it would be easy to inadvertently cross the line in minor ways if you hadn’t been operating in a disciplined manner from the start.
Other things to watch for is keeping operations and revenue not related to your intended exempt purpose separated and paying the appropriate taxes. You should also avoid self-dealing, lobbying and campaigning just as any non-profit would.
Just in case you are wondering, you can solicit donations while your tax status is pending, but you need to let people know donations are not deductible yet. The donations will be deductible retroactive to your date of incorporation (within a restricted time period). However, as Ellis Carter notes, if you make a mistake on your filing, your status is only retroactive to the date you fixed the mistake, not the date of incorporation. It is important to do things correctly from the start.