The Nonprofit FAQ

How Can We Make a Budget for the IRS Before We Start Work?
Tia wrote to NONPROFIT in January 1999:

I have been working on our budget off and on for four months to file
with our Form 1023 for 501(c)(3) status and still can't figure out
how people can predict what to put on a budget one and two years in
advance.

Sandy Deja ([email protected]) responded to this question on
January 11, 1999:


Tia asked how to create a 3 year budget in advance (for her IRS Form
1023 -
Exemption Application).

I teach a class offered by the Seattle IRS Taxpayer Education office
on how to
fill out Form 1023. This is a VERY common question.

The suggested approach is a good one. Set your goals, figure out
how much it will cost to accomplish your goals, figure out how
you'll raise the
money you need.

The problem can also be approached from the other end - how much
money do you
think you can raise? As an example, if you plan to charge
membership dues, how
many potential members are there, what percentage of these people
are likely to
actually become members, what amount of dues would they be
willing/able to pay?
Once you figure out how much you might be able to raise, you decide
what your
priorities are in spending it.

A third approach is available, since you have been in existence
several months.
If you feel that any of these months are representative of how the
organization will operate in the future, take that month and
multiply by twelve
for a year, maybe adding 5 to 10 percent for future years.

KEEP IN MIND that the fee the IRS will charge you is based on your
projected
budget. If you project an income of more than $10,000 per year, the
IRS will
charge you $500 instead of $150.

Putnam Barber offered some background on how to interpret the
significance of this part of the application for tax exempt
status:


I've never seen this said out loud, so I'm a little diffident about
saying it here, but I've always assumed that the budget projections
requested in the 1023 are related to the obscure fascination the IRS
has with the distinctions between "private" foundations and "public"
charities and to concerns about inurement. In other words, one
point of this exercise is to demonstrate that you expect to get your
revenues from a wide range of sources (thus meeting the public
support test for public charity status...assuming you want to) and
expect to use whatever resources you find for genuinely public
purposes, not just as a way of buying baby some new shoes. Proposed
new organizations with projections of large amounts of business
income -- related or unrelated -- may also face scrutiny on the
question of whether they are legitimately entitled to tax-exempt
status. The same point applies to organizations that forecast
making political contributions, or lobbying expenses in excess of
the limits set for such activities.

The details of day-to-day operations are probably not much of a concern to the
IRS analysts, assuming those pitfalls
are well out of the way.

(I also suspect that the 1023 owes some of its special character to
the way it has evolved over the years.
When it was first created, of course, the designers were probably
thinking of larger organizations that had been in existence for
some time, and were faced with the need to secure formal recognition
of their tax-exempt status. Such organizations
had plenty of track record on which to base these projections. The
recent expansion in the number of nonprofits, and hence the in
number of completely new organizations that must prepare
1023s, was not foreseen. It still continues to
amaze many and dismay a few.)




NOTE: You can download Publication 557, "Tax Exempt
Status for Your Organization," from the IRS website at
http://www.irs.ustreas.gov/plain/forms_pubs/pubs.html; it is also
available in printed form from the IRS. There is further discussion
of how to start a new nonprofit and of other issues discussed in
this item in the Nonprofit FAQ; choose the appropriate keyword at
http://www.nonprofits.org/npofaq/.

For specific help with completing Form 1023, see http://www.form1023help.com, the website based on the course taught by Sandy Deja in Seattle and mentioned above.





Posted with permission 1/16/99; form1023help info added 8/15/01 -- PB