Q&A #155 – Can a nonprofit convert to 501(c)(3) status from another tax-exempt status?
Question: I am the Executive Director of a 501(c)(4) nonprofit organization that is considering converting to 501(c)(3) status to expand our eligibility for grant funds and be more attractive to individual donors. Is it possible to change our federal tax-exempt status and what is the process for doing so?
Answer: An organization that was 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 necessary amendments to its Articles of Incorporation and submitting a Form 1023 application to the IRS. However, there may be complications to this process if the organization’s activities have not been consistent with 501(c)(3) status.
It is well-known that 501(c)(3) public charity status can open the door to expanded funding opportunities, such as grants from private foundations and government entities, and, of course, donations from individuals that are eligible for the charitable deduction.
While there are several possible ways to gain access to the advantages of 501(c)(3) status (including fiscal sponsorship and forming a 501(c)(3) subsidiary), in some cases the most simple approach is to change the organization’s existing tax-exempt status to 501(c)(3) status.
Converting to 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, this could include 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.
On the other hand, this process can be more complicated if the organization’s mission and operations 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 will probably need to explore modifying the restriction or using the funds consistent with their intended purpose prior to converting to 501(c)(3) status.
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Once these initial considerations have been resolved, 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. Most notably, 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, be aware that the Form 1023-EZ cannot be used for this process (see Question #11 in the Form 1023-EZ Eligibility Worksheet).
In the Form 1023 application, be prepared to explain the organization’s history, the reasons the organization is seeking to change its tax-exempt status, and the steps it has taken to modify its activities and ensure compliance with the rules governing 501(c)(3) organizations.
If approved, the change to 501(c)(3) status will typically 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 (i.e., incorporated).
Planning Tip – Prior to applying to convert to 501(c)(3) status from another tax-exempt status, it is important to discuss the issue of public charity vs. private foundation status with the organization’s accountants, attorneys, and other tax advisors. 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, may require significant modification of the organization’s planned operations and/or make the conversion to 501(c)(3) status impractical.
Note that while it is possible for an organization to convert to 501(c)(3) status from another tax-exempt status simply by amending its governing documents and submitting a Form 1023 application, under current IRS guidance this process does not apply to 501(c)(3) organizations that wish to change their tax-exempt status (see Rev. Proc. 2023-5, noting that the IRS will not issue determination letters to 501(c)(3) organizations which seek to be recognized “as described in a different subsection of § 501(c)”).
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