Should a New Nonprofit Start Fundraising Before 501c3 Status?

Caution May Be Your Best Bet

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Startup nonprofits often wonder if they can raise funds before they receive their tax-exempt status. For instance, one reader asked:

"I want to start a nonprofit for single parents with a employment staffing component to it, along with a liberal housing and education arm. Is there a way to fundraise in an effort to obtain the startup funding without having forwarded the IRS forms for nonprofit status approval? The operational funds are what our agency would need."

I invited Emily Chan, a San Francisco-based attorney who specializes in nonprofit, to explain. Here is her answer:

"Organizations can fundraise before receiving 501(c)(3) tax-exempt status. However, those contributions are not tax-deductible.

If the organization is subsequently granted exemption and the date of exemption precedes the date of the contribution, the donor may then be eligible to take a tax-deduction for that contribution which may require an amendment to that donor's personal tax return. 

Exemption is generally retroactive to the date of incorporation if the application is filed within 27 months of incorporation. 

Otherwise, exemption is recognized as of the date the application is filed.

Organizations should not give tax advice to donors but should inform donors they are not recognized as tax-exempt and the application is pending (if applicable). They should not say that they are certain to receive 501(c)(3) status.

Additionally, organizations should make sure that their state incorporation is in order.  If they fundraise outside their home state, they need to inquire about solicitation filing requirements in the states where they plan to fundraise."

Although, as Chan says, it is possible to fundraise before receiving tax-exempt status, tt might be wise to wait until you are incorporated as a nonprofit in your state and have your letter of nonprofit status as a 501(c)(3) from the IRS. 

Incorporation will protect your personal assets in case you are later sued.

Before incorporation, you are personally responsible for how you handle donated money. It's also unwise to let donors think that their contributions may be tax-deductible until you are sure of your legal status.

If you need to start raising funds before you are incorporated and officially designated a nonprofit by the IRS, you might want to consider a fiscal sponsor that can receive contributions for you. A fiscal sponsor is simply another nonprofit that is willing to handle your donations for you.

The bottom line is you must be careful about fundraising before you are officially tax-exempt. It can be done, but only if you abide by all of the legal requirements.

This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.