Obtaining 501(c)(3) Non-Profit Status

Do You Need A 501(c)(3)?

When you have formal tax-exempt status, many doors open for you! Most agencies that provide grants to animal welfare organizations require a 501(c)(3) determination letter (a letter that is issued by IRS that states an agency is a 501(c)(3) organization). For example, the Petfinder.com Foundation Sponsor-A-Pet program is open only to organizations with tax-exempt standing or municipal shelters with a fund dedicated to animal care.

Pet store-based adoption centers often require a 501(c)(3) determination letter to utilize adoption cages within their store. Some animal shelters require a 501(c)(3) determination letter from groups with whom they partner to move animals from the shelter environment to foster care.

Your group will not only be free from paying taxes on all income from activities related to its nonprofit purpose, but people and organizations that donate to a nonprofit can take a tax deduction for their contributions (the burden of proof for tax deductibility is on them should they be audited). Donors are hesitant to donate large sums to groups without 501(c)(3) status.

That's a powerful incentive for many people, and you can more actively reach out for financial support from your community based on the nonprofit status. The process of filing for tax-exempt status will also force your group to clearly identify its mission and goals, making it easier to engage people in the community who share your vision.

IRS exempt status provides credibility to the public and to other organizations you might partner with in the future. If you do not have 501(c)(3) status, people ask "why not?" If you say "It's too much work," or "We don't understand the process" or "We can't afford it," it may cast public doubt on your ability to improve your sheltering or rescue programs in the future.

Your organization is not required to file for federal tax-exempt status if your average gross receipts are less than $5,000 per year. “Gross receipts” are all the funds your organization brings in during the year, before deductions for animal care and other costs of your work. If your average gross receipts suddenly exceed $5000, your organization will need to submit an application for tax-exempt status to the IRS within 90 days of the end of that tax year.

Even without tax-exempt status, you need to keep track of funds that are given to you by donors. Completing the 501(c)(3) process provides you with a template for what the IRS wants and expects from a public charity. It is an education process as well as an application.

An alternative: "fiscal sponsorship?"

You may have heard about groups that are "under the umbrella" of another organization that already has tax-exempt status. This umbrella is called fiscal sponsorship.

For example, a local trap/neuter/return group that works closely with the local SPCA may "use the SPCA's 501" to show their pets for adoption at a pet supply store that requires 501(c)(3) standing.

Fiscal sponsorship is the affiliation of an individual or organization with another tax-exempt 501(c)(3) organization, enabling the first group to gain access to funding opportunities and other resources that are available to 501(c)(3) organizations. Fiscal sponsorship helps new and growing organizations that are acting in a nonprofit manner, but don't have the legal status of a nonprofit organization.

Most foundations or sources of corporate funding restrict grants to 501(c)(3) tax-exempt organizations. Individual donors will often only make a charitable contribution if it is clearly tax-deductible. A fiscal sponsorship permits your group to apply for grants from organizations which normally would only fund projects for groups with nonprofit status.

The "fiscal agent" is responsible for insuring that all projects are conducted according to IRS regulations. This means your sponsoring organization will request some control over your project. In some cases, the fiscal sponsor may ask your group to submit a written contract that clearly outlines your relationship with them. The sponsoring organization is legally responsible for the donations or grants your group receives.

Every fiscal sponsorship program is different. In some cases, the sponsoring organization's board of directions may want to be closely involved in your decisions. In other cases, the fiscal agent may be happy to allow your group to retain your own identity and independence. In all cases, trust and responsibility are expected and required.

The Foundation Center has an excellent resource on locating a fiscal agent and other examples of fiscal agreements.