Question: I am the Executive Director of a Section 501(c)(4) social welfare organization that would like to reclassify to Section 501(c)(3) exempt status in order to expand our eligibility for grant opportunities and boost our fundraising efforts. Can we ask the IRS to reclassify our exempt status and, if so, how?

Answer: Yes. A nonprofit organization previously recognized as tax-exempt under another subsection of 501(c), such as 501(c)(4) or 501(c)(6), generally may convert to 501(c)(3) status by making the appropriate amendments to its Articles of Incorporation (and possibly its Bylaws) and submitting a Form 1023 application to the IRS.

Converting to Section 501(c)(3) status from another tax-exempt status is generally easiest for organizations whose activities are already mostly or fully consistent with 501(c)(3) status. For example, a 501(c)(4) organization with an educational or advocacy mission that does not engage in political campaign activities and whose “direct lobbying” and “grassroots lobbying” communications are already within the applicable 501(c)(3) limits.

Conversely, this reclassification process can be more complicated if the organization’s mission and activities require significant modification to comply with 501(c)(3) status. For example, if the organization has raised funds that are donor-restricted for a specific purpose that is not charitable, educational, or otherwise consistent with 501(c)(3) status, the organization might need to explore modifying the restriction or using the funds consistent with their intended purpose prior to converting to 501(c)(3) status.

Once these considerations have been identified and addressed, the next step to converting to 501(c)(3) status is amending the organization’s governing documents to be consistent with 501(c)(3) status. These changes will require approval by the board of directors and potentially the members of the organization, if the organization has members with voting rights. In particular, the organization will need to add the required 501(c)(3) purpose and dissolution language to its Articles of Incorporation.

Applying to the IRS to convert to 501(c)(3) status is relatively straightforward and uses the same Form 1023 application that newly formed organizations use. However, it is worth noting that the abbreviated Form 1023-EZ cannot be used for this process (see Question #11 in the Form 1023-EZ Eligibility Worksheet), which is unfortunate since the Form 1023-EZ form is much shorter, the filing fee is lower, and the review time is much shorter than the regular Form 1023.

Upon IRS approval of the Form 1023 submission, the reclassification to 501(c)(3) status will take effect on the date the Form 1023 was submitted to the IRS, since most existing organizations will be submitting the application later than 27 months after the end of the month in which they were legally formed.

Prior to applying to convert to 501(c)(3) status from another tax-exempt status, it is important to consider the distinction between public charity vs. private foundation status with the organization’s accountants. An organization that has been in existence for more than 5 tax years will be required to establish that it qualifies as a public charity rather than a private foundation, typically by showing that satisfies one of the mathematical public support tests under Internal Revenue Code §§ 170(b)(1)(A)(vi) or 509(a)(2) based on its sources of revenue over the most recent 5 tax years. Private foundation status, if applicable, will likely require substantive changes to the organization’s operations in order to make the conversion to 501(c)(3) status feasible.

Reach out anytime with questions or if Perkins Law can be of assistance with your nonprofit organization.