All the information in this post is from my professional reference and
personal knowledge.  You should always consult your local legal help for
questions and not rely on this information.
 
Part 2. "Tax-exempt" IRS 501(c)(3)
Once nonprofit status is granted, you may qualify to apply for "tax-exempt"
status.  Tax-exempt status is granted by the Internal Revenue Service and
is based on regulations promulgated in '501(c)(3) of the Internal Revenue
Code.  The function and role of organizations that are allowed tax-exempt
status are strictly limited and controlled since this status essentially
means that fewer taxes will be collected by the IRS.  You may actually
qualify to be a 501(c)(3) organization without filling out the paperwork
but the only way to get that coveted letter from the IRS is to fill out
Form 1023.
 
The requirements to be granted tax-exempt status are that;
 1. You are a nonprofit corporation and
 2. Your purposes are exempt and
 3. You are both organized and operated exclusively for exempt purposes
    and
 4. No private person or profit corporation is profiting from your group
    and
 5. Your group does not do substantial lobbying or engage in any political
    activity.
 
It is number 4 that knocks out many from qualifying for 501(c)(3) status.
 
Just as "nonprofit" is a misnomer, so are the words "tax-exempt".  An
organization that is granted "tax-exempt" status is not truly exempt
from all taxes since taxes must be paid on certain sources of income.
The benefits from being a tax-exempt organization are:
 
1. Exemption from most federal income tax
2. Donors can deduct the charitable contribution on their tax returns
   to the extent allowed by law
3. Certain groups can make grants to '501(c)(3) groups without jumping
   through special hoops
 
Advantages: Most income to the group will be tax-exempt.  Once tax-exempt
status is granted, donations to the group may be tax-deductible.
 
Disadvantages: Oh those forms and attachments!  And that filing fee
($165-500)!  It took us months to fill out the forms in our spare time but
it was worth it!  And then there is the documentation that must be kept and
the reports that must be filed.  You are subject to IRS scrutiny and if you
don't follow the rules, the penalties can be substantial, including civil
penalties to the Board of Directors.  The 1023 must be filed in a timely
manner in order for donations made at the inception to qualify to be
written off by the donor.
 
[Moderator's note: Not to mention that if you are 501(c)(3) status,
doesn't that mean you can't lobby to have ferrets gain legal status
in, say, California?  (I think no more than 5% can be spent lobbying
or something like that...)  BIG]
[Posted in FML issue 2879]