Deductions for Contributions Made to a Charity Before Its Tax-Exemption Application Is Approved

Question: My Texas nonprofit corporation filed its IRS Form 1023 and applied to the IRS to become a tax-exempt charitable organization. The current average wait time for the IRS to approve an application for tax-exempt status is well over a year. Can we tell prospective donors that their contributions to our charity while it’s tax-exempt application is pending are tax deductible on their IRS Form 1040s?

Answer: “Yes, but your organization should include the warning that contributions are tax deductible so long as the organization actually gets its tax exemption.

When the IRS approves a timely filed exemption application, exempt status is recognized back to the date the organization was created. Thus, while an application is pending, the organization can treat itself as exempt from federal income tax under section 501(c)(3). For example, it must file Form 990 (instead of an income tax return) while its application is pending. However, contributors to the organization do not have advance assurance of deductibility because the organization’s exemption is pending. If the organization ultimately qualifies for exemption for the period in which the contribution is made, the contribution will be tax-deductible by the donor. Alternatively, if the organization ultimately does not qualify for exemption, then the contribution will not be tax deductible.

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