Leadership & Strategy
The 27-month clock most founders don't know about
When a new nonprofit applies for exemption decides whether its earliest donations are deductible, and the window closes at 27 months.
By The Editors · The Game of Giving
The BriefLeadership & Strategy
A new nonprofit corporation is not tax-exempt until the IRS recognizes it. What many founders do not realize is that the timing of the application can reach backward.
If an organization files Form 1023 within 27 months after the end of the month in which it was formed, and the IRS approves the application, exemption is generally recognized back to the date of formation. Gifts received during that period can then qualify as deductible contributions.
File after the window closes and the effective date of exemption may be later, unless an exception applies. Donations received in the gap may not be deductible, which is a difficult thing to explain to early supporters.
The fix is to decide at incorporation when you will file, and to put the deadline on the calendar that day. Until exemption is recognized, tell donors plainly that the application is pending. The Playbook chapter on Form 1023 and 1023-EZ covers which form to use.
General information for donors and nonprofit leaders, not legal or tax advice. How we report is set out in our editorial guide.
