Chasing the Coveted (c)(3): The Trials and Tribulations of Form 1023
Obtaining 501(c)(3) exemption status from the Internal Revenue Service (IRS) may be one of the most effective ways to open doors for your farmers market— 501(c)(3) status holders have been known to wax poetic about how their exemption has increased their credibility and widened their access to funding from foundations and federal grants. However, as useful as 501(c)(3) status may be, there is no doubt that obtaining it can also be one of the most frustrating and challenging pursuits undertaken by farmers market managers and board members. Here, the Farmers Market Coalition answers a few of its most frequently asked questions about farmers markets and 501(c)(3) status.
What is 501(c)(3) status?
501(c) is a provision in the US Internal Revenue Code that describes the 26 types of tax-exempt nonprofit organizations, ranging in title from 501(c)(1) to 501(c)(27). Of these, 501(c)(3) is the most commonly sought after, and includes nonprofits that are organized and operated for religious, charitable, scientific, public safety, literary, or educational purposes. Many states use this same 501(c) provision in their definitions of organizations exempt from state taxation.
Why should markets care about 501(c)(3) status, anyway?
501(c)(3) status includes the ability to accept contributions and donations that are tax-deductible to the donor, exemption from federal and/or state corporate income taxes, and in many cases exempt from state sales and property taxes. Two most frequently cited benefits are increased public legitimacy and awareness of your market due to IRS recognition and the eligibility to apply for the many private and public grants that are only available to IRS-recognized 501(c)(3) organizations. There can also be other, less tangible benefits. For example, Eileen Nichols of the Webb City Farmers Market in Missouri found that because the 501(c)(3) requirements synched up well with her market’s goals, the status has “helped keep the market on mission.” Furthermore, with the IRS expecting high levels of transparency from exempted organizations, Nichols finds that the status has ensured good governance of the market.
What activities make a farmers market eligible for 501(c)(3) assignment?
Generally speaking, it’s unlikely that a market will be actively pursuing religious or literary goals, preventing cruelty to children or animals, performing scientific testing for public safety, or promoting amateur athletics. This leaves two options recognized by the IRS: education and public charity. There are numerous educational activities that can make a farmers market eligible, such as hosting health & cooking demonstrations, putting out a newsletter, or offering informational materials at the market. Charity can also be a promising route; as Washington DC’s FreshFarm Markets successfully noted in their application, the term charitable includes relief of the poor, lessening the burdens of government, lessening neighborhood tensions, and combating community deterioration—all things that many farmers markets do regularly. Indeed, a farmers market may be eligible on the merits of its community-building work, any relief it offers to lower-income community members, or a statement from local government officials about how it eases the government’s burden.
What other statuses might a farmers market be given?
Mike Bevins, state horticulturalist with the Iowa Department of Agriculture and Land Stewardship, has helped both the Iowa Farmers Market Association and the Farmers Market Coalition with their 501(c)(3) applications, and offers the following words of caution: “The IRS will probably want to put the market under (c)(5) status—and maybe it should be there!” If the IRS is not sufficiently convinced of a market’s educational or public charity merits, it may instead grant it 501(c)(5) status, indicating that it is a labor, agricultural, or horticultural organization. Markets should also prepare for the possibility of being assigned (c)(4) status, as a civic league or social welfare organization, or (c)(6) status, as a business league. Andy Kitsinger, the founding chair of the Memphis Farmers Market, applied for (c)(3) status but was assigned (c)(4). He believes that this may have happened because the IRS overlooked the “community development, health education, and small business incubator” functions of his market, instead simply viewing it as a for-profit vendor cooperative.
I’m a market manager. How can my market increase its chances of being assigned 501(c)(3) status?
First, think hard about your market’s public and educational activities. Mike Bevins says, “If you want to be (c)(3), you need to focus on how your market helps the public in general, not just the vendors—specifically, how are you educating the public about the benefits of healthy eating, preserving agriculture, and buying local at the market?” In this vein, Eileen Nichols made sure to include everything in her application that related to the public and education, including “nutrition education, especially for low-income at-risk populations, community fundraising and support for other nonprofits, and food security work.” Andy Kitsinger a suggests that the term “public market” instead of or in combination with “farmers market” could emphasize a commitment to public education and community-building. If you choose to play this name game, be careful not to claim or imply charitable public activity that your market does not intend to perform, or unintentionally marginalize the ‘farmer’ part of the market. A (c)(6) trade association may be the way to go if the market is exclusively farmer-governed and not significantly devoted to community outreach and education.
Second, seek the help of market supporters. The most useful advice Nichols received was from another successful applicant who “had the mayor, state representatives, and aldermen write letters confirming” that the market relieved a burden on the government—a strategy that worked after their previous application based solely “on the premise of helping farmers and bringing healthy food to the city” failed. By taking this advice and including many letters of support not only from public officials but from “farmers, and shoppers who could attest that the market helped them eat healthier,” Nichols found that her application “sailed through the IRS.”
Third, if the going gets tough, get legal representation. Bevins notes that both times he has applied, the application went nowhere until he hired legal representation. Even so, he says, “expect to wait a couple of years.” Kitsinger, who did not have legal help for his first unsuccessful application, has now hired some, and is more hopeful about his chance of success. Simply put, as Bevins says, it’s all too easy to “get tripped up and bogged down” with the paperwork. A lawyer can help.
How does a farmers market obtain 501(c)(3) status?
Before thinking about applying, every market should make sure to have its board of directors in place, and develop articles of incorporation. Mike Bevins notes that it can also help one’s chances to file Form 990 paperwork (an annual IRS return for nonprofits) before submitting the 501(c)(3) application. The next step is completing the 29-page 501(c)(3) application Form 1023. Questions pertain to the organization’s legal structure, governing board, conflicts of interest, budget and financial history, and the organization’s activities. Following this, there is space for a narrative essay outlining the organization’s programs, both current and planned, that are in line with its exempt purpose. The form is then filed with the Exempt Organizations Division of the IRS in Cincinnati, Ohio—e-filing is expected to roll out sometime this year.
As for the nitty-gritty: Form 1023 filings range between 50 and 100 pages of information. Examples of successful applications, such as Webb City Farmers Market’s, may be found in FMC’s online Resource Library. Form 1023 should be filed within 15 months of market incorporation if possible; the Foundation Group, a 501(c)(3) advisory group, notes that 27 months after incorporation, the chances of being assigned 501(c)(3) status decrease dramatically. The filing fee for Form 1023 is $850 for organizations with greater than $10,000 in gross annual revenue. Smaller organizations pay only $400. The IRS estimates that a novice will need over 100 hours to prepare the form; the IRS itself takes between two and 12 months to review the application. However, with the exception of California, once the federal process is complete, only a one or two page form need be submitted to the state government.
What should farmers markets expect the process to be like?
In two words: difficult and long. Kitsinger observes that the IRS application review seems to be “tightening or inconsistent in its classification of farmers markets”; Bevins observes that while “10 years ago you didn’t have much of a problem and could get status easily, now they’ve raised the rates, and tightened the status much more severely, especially for borderline (c)(3) organizations like farmers markets.” Whether or not these observed trends are true—the IRS is quite tight-lipped about its review process—there is little question that the application takes a lot of time and energy to complete, and may not be met with immediate success. Still, the worst thing a farmers market could do is be discouraged. After all, all the 1023-induced headaches could just be a test of your commitment. As Bevins says, “The IRS wants to see how serious you are. Even if they say no at first, if you keep going after it and prove you are in it for the long haul, things just might start moving along.”
Does your market have a successful 501(c)(3) application? FMC invites you to share it with your peers by submitting to the Farmers Market Resource Library.