Question: Is tax-exemption the same as 501(c)(3)?

I have a tax-exemption number and have been told that it is the same as being a 501(c)(3) because we are a nonprofit organization. But I can’t get certain places to make donations to our upcoming fundraiser because I don’t have a letter that says we have 501(c)(3) status. How do I get this letter?

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Advice from PTO Today

Elly writes:

The number you’re most likely referring to is your parent group’s employer identification number (EIN). It’s a number the IRS has assigned to identify your group as a legal business entity. You need an EIN to get a bank account, for instance. But the fact that the IRS assigned this number to you does not automatically designate your group as tax-exempt. To be designated as such, your group needs to pay a fee and file the Application for Recognition of Exemption (form 1023 or 1023-EZ) with the IRS.

The letter you mention is known as a “determination letter” from the IRS. It declares your PTO a tax-exempt charity (nonprofit) under section 501(c)(3) of the federal tax code. You receive this letter only after the IRS has processed and approved your group’s form 1023 application. You are then exempt from business income tax (with some rare exceptions).

Exemption from sales tax is made under state, not federal, law. Rules vary from state to state; check with your state’s treasury or commerce department or the official state website for specifics.

There are many benefits to filing for tax-exempt status with the IRS. For one, supporters who donate to your group can, for the most part, deduct those donations from their taxes. That’s why, as you’ve experienced, many businesses will only donate to official 501(c)(3) organizations. In addition, many grants are open only to 501(c)(3) groups.

For help filing form 1023, check out PTO Today’s Startup Toolkit. You can also get more information from the Internal Revenue Service website or by calling 877-829-5500.