Over the last 15 years, the IRS has made life much easier for small nonprofits. The first big change was to create a Form 990-N, which allowed nonprofit organizations with less than $50,000 in gross receipts to file the 990-N “e-postcard.” Unlike the lengthy Form 990 that requires detailed accounting information and disclosure of the highest compensated employees, the e-postcard only requires 8 pieces of information:

Employer identification number (EIN), also known as a Taxpayer Identification Number (TIN).
Tax year
Legal name and mailing address
Any other names the organization uses
Name and address of a principal officer
Web site address if the organization has one
Confirmation that the organization’s annual gross receipts are $50,000 or less
If applicable, a statement that the organization has terminated or is terminating (going out of business)

This simple change saved small nonprofits hundreds of (usually volunteer) hours that could’ve been spent preparing Form 990.

Next, the IRS simplified the process for applying for nonprofit status for organizations with gross receipts under $50,000 and assets under $250,000. The Form 1023 is 30 pages, and requires detailed budgets and financial projections. In contract, the Form 1023-EZ is two and a half pages.

That said, there are some tricky questions.

The form asks about the organization’s purpose. If the state purpose does not align with the list of exempt purposes that the IRS has published, it will not be granted tax-exempt status.

Another tricky question concerns unrelated business income. Nonprofits are prohibited from engaging in money-generating activities that are unrelated to its exempt purpose. This can be confusing, because fundraising by itself can trigger a problem with unrelated business income. Unrelated business income (also called UBI) has three characteristics:

it is a trade or business
it is regularly carried on
it is not substantially related to the exempt purpose (beyond bringing in funding)

Consider as an example a school that sells t-shirts with their logo. The selling of t-shirts is a business, and selling t-shirts is not substantially related to educating students. However, if t-shirts are only sold “occasionally” — for example, only at the beginning of the year — it won’t be qualified as UBI. Similarly, if a small quantity is sold, arising to a tiny percentage of the overall budget, it is unlikely to be categorized as UBI because it isn’t being used as a normal t-shirt selling business.

Consider a second example: Goodwill Industries sells donated clothing. The selling of donated clothing, even at a sharp discount, is not related to any exempt purpose recognized by the IRS. However, job training and education is an exempt purpose. Because the people who work at Goodwill are receiving on-the-job training and support, the sale of donated clothing is substantially related to their exempt purpose.

In short, the entryway for small nonprofits is markedly easier to reach now than ever.