While you wait for 501(c)(3) status, you can run your nonprofit as if it were already exempt: launch programs, hire staff, sign leases, and accept donations. The IRS lets you treat the organization as tax-exempt during review, and if the application is approved, that status is retroactive to your legal formation date.1Internal Revenue Service. Contributions to Organization With IRS Application Pending The catch is that retroactivity only helps if you have actually met the obligations of an exempt organization the whole time, so the waiting period is a working period, not a pause.
For context on how long you’ll be here: the IRS closes about 80% of Form 1023 applications within 191 days, and 80% of Form 1023-EZ applications within 22 days. If the IRS asks for more information on a 1023-EZ, the 80% mark stretches to 120 days.2Internal Revenue Service. Where’s My Application for Tax-Exempt Status
Operate the Organization You Described
You can start doing the work from day one. The one rule that governs everything else during the wait is consistency: your actual activities need to line up with the purpose and programs described in your articles of incorporation, your bylaws, and your Form 1023. The IRS reviews those documents to confirm you’re organized and operated exclusively for exempt purposes, and drift between what you wrote and what you’re doing can slow the review or lead to denial.3IRS.gov. Good Governance Practices
One deadline sits behind all of this. To get exempt status retroactive to your formation date, your application must be filed within 27 months from the end of the month in which you were formed. Miss that window and the IRS may only recognize your exemption from the date it received the application, which leaves earlier donations undeductible.4Internal Revenue Service. Form 1023: Purpose of Questions About Organization Applying More Than 27 Months After Date of Formation
Hiring and Payroll
If you bring on employees, you owe federal employment taxes like any other employer. Wages are subject to Social Security and Medicare (FICA) withholding once an employee earns $100 or more in a year. Section 501(c)(3) organizations are exempt from the Federal Unemployment Tax Act (FUTA).5Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption Because the IRS lets you treat yourself as exempt during review, you can claim that FUTA exemption while pending. Keep clean payroll records in case the IRS revisits it later. If your application is denied, back FUTA taxes are on the table, so weigh that when deciding how quickly to add paid staff.
Fundraise, but Tell Donors the Truth
You are allowed to solicit and accept donations right away. If your application is approved, those gifts become tax-deductible retroactive to your formation date. If it’s denied, none of them will be deductible.1Internal Revenue Service. Contributions to Organization With IRS Application Pending
Donors do not have advance assurance of deductibility while your application is pending.6Internal Revenue Service. Exempt Organizations General Issues: Deductibility of Contributions While Application Pending Say so plainly when you ask for gifts. Most people will still give; they deserve to know the deduction depends on approval.
Acknowledgments and Disclosures
The substantiation rules apply now, not later. For any single contribution of $250 or more, you must provide the donor a written acknowledgment that includes your organization’s name, the cash amount or a description of any non-cash property, and a statement about whether you gave anything in return. If you did, include a good-faith estimate of its value.7Internal Revenue Service. Charitable Contributions: Written Acknowledgments
Separately, if a donor pays more than $75 in a transaction that is partly a contribution and partly payment for goods or services (a gala ticket, a fundraising dinner, a gift basket), you must give a written disclosure stating that only the amount exceeding the value of what they received is deductible, along with your good-faith estimate of that value.8Internal Revenue Service. Charitable Organizations: Substantiation and Disclosure Requirements9Office of the Law Revision Counsel. 26 USC 6115 – Disclosure Related to Quid Pro Quo Contributions Issuing these on time is far easier than reconstructing them months later when donors need them for their returns.
File Your Annual Return Even Without a Determination Letter
This catches many new nonprofits off guard. If a return comes due while your application is pending, you still have to file it. E-file Form 990, Form 990-EZ, or Form 990-N depending on your size, and check the box on page 1 indicating that exempt status has not yet been recognized.10Internal Revenue Service. Tax Law Compliance Before Exempt Status Is Recognized
Organizations with gross receipts of $50,000 or less can file the Form 990-N e-Postcard.11Internal Revenue Service. Annual Electronic Notice (Form 990-N) for Small Organizations FAQs Larger organizations file the 990-EZ or the full 990. If you earn more than $1,000 in unrelated business income, e-file Form 990-T as well.10Internal Revenue Service. Tax Law Compliance Before Exempt Status Is Recognized
Do not skip these. Under Section 6033(j), an exempt organization that fails to file its required return for three consecutive years automatically loses its tax-exempt status.12Internal Revenue Service. Automatic Revocation of Exemption The clock starts when your first return comes due, whether or not the determination letter has arrived.
Handle State and Local Registrations Now
Federal recognition is one layer. State and local requirements are separate, and most apply whether or not your IRS application has been decided.
Charitable solicitation registration is the first one to look at. Most states require charities to register before soliciting donations from the public, with their own fees and renewal cycles. Online fundraising can trigger registration in multiple states at once. Fees vary by jurisdiction, and some states scale them to your revenue.
State income, sales, and property tax exemptions usually require a copy of your IRS determination letter, so you typically cannot get them while pending. Plan to apply as soon as the letter arrives, and budget for paying sales tax on purchases in the meantime. Some of that may be recoverable later through refund applications, depending on the state.
Corporate good-standing filings also do not wait. Many states require nonprofit corporations to file annual or biennial reports with the Secretary of State. Missing them can lead to administrative dissolution, which is a far bigger problem than a late fee. Calendar those deadlines the day you incorporate.
You should already have an EIN, since Form 1023 requires one. Use it for bank accounts, employment tax returns, and every state registration.13Internal Revenue Service. Form 1023: EIN Required to Apply for Exemption
Keep the Records the IRS Will Ask For
The waiting period is the worst time to let recordkeeping slide. If the IRS requests additional information mid-review, you want to answer quickly with organized documentation rather than reconstruct months of activity. Four categories matter:
- Financial records: income, expenses, bank statements, and a clear accounting of how funds are spent. Track any unrelated business income separately.
- Donor records: each donor’s name, address, gift amount, date, and the acknowledgment you issued.
- Organizational documents: articles of incorporation, bylaws, board meeting minutes, and any amendments.
- Program records: what your programs accomplish, who benefits, and how the work connects to your stated mission.
Adopt a Conflict of Interest Policy
The IRS encourages every 501(c)(3) to adopt a written conflict of interest policy, and Form 1023 asks whether you have one. The policy should require board members and officers to disclose situations where personal financial interests could conflict with the organization’s mission and should bar conflicted individuals from voting on those matters. Excessive compensation to insiders or uncompensated benefits can cost an organization its exempt status.14Internal Revenue Service. Form 1023: Purpose of Conflict of Interest Policy If you didn’t include one with the application, draft and adopt one now.
Checking Status and Responding to IRS Requests
The IRS does not send progress updates. Check the Tax Exempt Organization Search (TEOS) tool on the IRS website; your approval may appear there before the paper letter arrives. If your submission predates the current posted processing window and TEOS shows nothing, call the exempt organizations line at 877-829-5500 with your organization’s name, EIN, the form you filed, and your Pay.gov confirmation date. Only an authorized officer, director, or a tax professional holding a valid Form 2848 can make the inquiry.2Internal Revenue Service. Where’s My Application for Tax-Exempt Status
If the IRS sends a request for additional information, that is not a warning sign; it is routine. Respond within the stated timeframe. Slow or incomplete responses are the biggest cause of processing delays. In rare cases the IRS may request an interview or site visit. Whoever represents your organization should know the application in detail, have records organized, and be able to explain how operations connect to your exempt purpose.
If the Application Is Denied
Denial has real consequences. The organization will not be exempt from federal income tax, and every donation received during the pending period will be non-deductible for the donors who made it. Denial can also block the state-level exemptions that depend on the IRS determination.1Internal Revenue Service. Contributions to Organization With IRS Application Pending
You can appeal. The IRS sends a proposed adverse determination letter explaining its reasons, and you have 30 days from the date of that letter to file a written protest requesting review by the IRS Independent Office of Appeals. Send the protest to the address on the determination letter, not directly to Appeals. The examining office tries to resolve the issues first and forwards the case to Appeals if it cannot.15Internal Revenue Service. Preparing a Request for Appeals For many organizations, the better path is to address the specific deficiencies the IRS identified, fix them, and reapply, keeping in mind that the user fee applies again.