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 (exempts@aol.com) 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