Starting a Nonprofit: Form 1023 or 1023-EZ
The steps from a state nonprofit corporation to federal tax-exempt status, the two application forms and who may use the short one, the organizational and operational tests, and what comes after approval.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A 501(c)(3) organization starts as a state nonprofit corporation with a charitable, educational, religious, or similar purpose written into its articles, then applies to the IRS for recognition of exemption on Form 1023 or, for small organizations with annual gross receipts of $50,000 or less and assets of $250,000 or less, the streamlined Form 1023-EZ.
On this page
What are the steps?
| Step | Detail |
|---|---|
| 1. Incorporate under state law | Articles must limit purposes to exempt ones and dedicate assets to charity on dissolution |
| 2. Adopt bylaws and a conflict of interest policy | Board of at least three unrelated directors is the practical norm |
| 3. Obtain an EIN | Required before applying |
| 4. Apply for exemption | Form 1023 (full) or Form 1023-EZ (streamlined), filed online with the user fee |
| 5. Register with the state | Charitable solicitation registration before fundraising; Florida requires registration with the Department of Agriculture and Consumer Services under Chapter 496, Florida Statutes, approved before any solicitation |
| 6. Apply for state tax exemptions | Florida sales tax exemption certificate; property tax exemption where applicable |
| 7. File annually | Form 990-series return each year; state renewals |
Form 1023 or 1023-EZ?
| Feature | Form 1023 | Form 1023-EZ |
|---|---|---|
| Who may use it | Any applicant | Projected annual gross receipts of $50,000 or less in each of the next three years, actual gross receipts of $50,000 or less in each of the past three years, assets of $250,000 or less, and not on the excluded list (churches, schools, hospitals, supporting organizations, foreign organizations, LLCs, private operating foundations, and others) |
| Length | Detailed narrative, financial projections, and attachments | Attestation-based online form |
| User fee | $600 (2026) | $275 (2026) |
| Processing | Months | Weeks |
| Scrutiny | Reviewed in full | Approved largely on attestation; the IRS reviews a random sample before approval and can examine organizations later |
Organizations that expect to grow, seek foundation grants, or operate programs with complexity often file the full form; funders sometimes prefer it.
What are the tests?
- Organizational. The governing document limits the organization to exempt purposes and dedicates assets to charity on dissolution.
- Operational. The organization actually operates primarily for exempt purposes, with no private inurement to insiders, no more than incidental private benefit, no substantial lobbying, and no political campaign activity.
- Public charity or private foundation. Organizations funded by the public or by program fees are public charities; those funded by one family or company are private foundations, with stricter rules and excise taxes.
What happens after approval?
The determination letter is the proof donors and grantors rely on. The organization files Form 990, 990-EZ, or 990-N each year; three consecutive missed filings revoke the exemption automatically. State registrations renew annually. Changes in purpose, structure, or activities are reported on the annual return.
Frequently asked questions
Can I pay myself as the founder?
Reasonable compensation for services is permitted; excess compensation to insiders is inurement and can cost the exemption and trigger excise taxes.
Can donors deduct gifts before the IRS approves?
If the application is filed within 27 months after the end of the month of formation and approved, exemption is retroactive to formation, and gifts in the interim are deductible.
Does a nonprofit pay sales tax in Florida?
Yes, on its purchases, until it obtains a Consumer's Certificate of Exemption (Form DR-14, applied for on Form DR-5) from the Florida Department of Revenue; the federal determination letter alone is not enough.
Can a for-profit business convert into a nonprofit?
A new nonprofit corporation is formed; assets transferred to it are a contribution, and the former owners cannot retain any interest.
Official sources
The IRS explains: “As of January 31, 2020, Form 1023 applications for recognition of exemption must be submitted electronically online at Pay.gov.” — Internal Revenue Service, Applying for tax exempt status, https://www.irs.gov/charities-non-profits/applying-for-tax-exempt-status
The IRS explains: “Read the Instructions for Form 1023-EZ and complete its Eligibility Worksheet found at the end of the instructions. (If you are not eligible to file Form 1023-EZ, you can still file Form 1023.)” — Internal Revenue Service, About Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, https://www.irs.gov/forms-pubs/about-form-1023-ez
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk prepares the exemption application and the first-year state registrations together. See pricing or book a free fit call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
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