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  • Writer's pictureDavid Carlson

Subject: What is a 501(c)(3)?

What is a 501(c)(3)?

Many people use these terms interchangeably: nonprofit, charity, exempt organization, and 501(c)(3). In reality, an organization could be one of those, all of those, or somewhere in between.

What is a 501(c)(3)?

Section 501(c)(3) is the portion of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations that meet the code’s requirements. These nonprofits may be considered public charities, private foundations, or private operating foundations, which we’ll explain in more detail later.

501(c)(3) is just one category of 501(c) organizations, but it is the primary nonprofit status through which donations made to the organization are tax-deductible. 501(c)(3) status is regulated and administered by the US Department of Treasury through the Internal Revenue Service.

What are the requirements to be a 501(c)(3)?

Qualifying Entities

The overwhelming majority of 501(c)(3) organizations are nonprofits

Purpose Limitations

In order to qualify as a tax-exempt, 501(c)(3) organization, a nonprofit must exist for one or more exclusively charitable purposes:

Religious: The organization truly holds religious beliefs and its practices adhere to public policy.

Most importantly, organizations that hold 501(c)(3) status must not serve any private interests, and their earnings must be used for charitable purposes only. In addition, all assets are permanently dedicated to a charitable purpose. In the event that a 501(c)(3) organization must cease operations, all assets remaining after debts are paid must be distributed for a charitable purpose.

Additionally, if a 501(c)(3) organization’s mission changes over time, it must inform the IRS of the change to keep its 501(c)(3) status.

Restrictions on Activities

501(c)(3) organizations are highly regulated entities. Strict rules apply to both the activities and the governance of these organizations to ensure they truly fulfill their IRS-defined purposes. This means that the organization’s work should solely serve its charitable purpose, not aiming to benefit shareholders or influence legislation in any way.

Intervention in political campaigns or the endorsement/anti-endorsement of candidates for public office is strictly prohibited.

Some lobbying, both direct and grassroots, is allowable. However, it should not represent more than 10-20% of the organization’s activities, nor consume any more than 10-20% of the resources of the organization. Nonprofits that engage in lobbying activity are discouraged from filing Form 1023-EZ and should file a complete Form 1023 instead.

Additionally, if a 501(c)(3) organization’s mission changes over time, it must inform the IRS of the change to keep its 501(c)(3) status.

Types of 501(c)(3) Organizations

501(c)(3) organizations may take one of three primary structures: public charities, private foundations, and private operating foundations.

Public Charity

Public charities are what most people recognize as those organizations with active programs. Examples include churches, benevolence organizations, animal welfare agencies, educational organizations, etc. These organizations usually receive a substantial portion of their revenue from the general public or from the government.

In order to remain a public charity (and not a private foundation), a 501(c)(3) must obtain at least 1/3 of its donated revenue from a fairly broad base of public support. Public support can be from individuals, companies, and/or other public charities.

Donations to public charities can be tax-deductible to the individual donor up to 60% of the donor’s income, although other tax and income circumstances can affect the deductibility of contributions to public charities.

In addition, public charities must maintain a governing body that is mostly made up of independent, unrelated individuals. This means the majority of board members should not be related by blood, marriage, or outside business connection.

Provisions Unique to 501(c)(3) Organizations

One of the most distinct provisions unique to Section 501(c)(3) organizations as compared with other tax-exempt entities is the tax deductibility of donations. 26 U.S.C. § 170 provides a deduction, for federal income tax purposes, for donors who make charitable contributions to most types of 501(c)(3) organizations. Regulations specify which such deductions must be verified in order to be allowed.

Other unique provisions tend to vary by state. Like federal law, most states allow for deductibility for state income tax purposes. Also, many states allow 501(c)(3) organizations to be exempt from property taxes and sales tax on purchases. Special nonprofit, bulk-rate postage discounts are available from the Post Office to qualifying organizations.

Please note: I like the 501c-3 designation for the simple reason that it spares Emmaus from getting involved in a donation to an individual. - David

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