When you browse a charity or private foundation's website, you'll often find the words "501(c)(3)" on it. So what is it and why is it so popular among nonprofits?
501(c)(3) refers to section 501(c)(3) of the US Internal Revenue Code — a section that allows certain nonprofit organizations to be exempt from corporate income federal tax. Note that 501(c)(3) is just one of the 501(c) organizations the IRS provides, but it is the most common way in which nonprofits make their donations tax deductible.
In this post, we'll discuss which nonprofits meet the code's requirements and how to apply for 501(c)(3) status.
Which Business Structures Can Seek 501(c)(3) Determination?
Typically, 501(c)(3) organizations are nonprofit corporations. However, 501(c)(3) organizations do not always have to be nonprofits. Nonprofits, corporations, trusts, and unincorporated associations can all apply for 501(c)(3) status and be approved by the IRS if they meet the requirements described below. LLCs can also seek a 501(c)(3) determination if all of its members are made of other 501(c)(3) organizations.
How to Qualify as a 501(c)(3)?
To qualify as a 501(c)(3), your organization must exist exclusively for a charitable purpose, as defined by the Internal Revenue Code. The IRS considers the following purposes to be charitable: religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.
Exclusively charitable purposes under the Internal Revenue Code are religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.
If your organization doesn't advance one of the aforementioned purposes, the IRS considers whether your organization operates for a generally charitable purpose.
The IRS defines “charitable” activities as “relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency."
As stated above, organizations seeking 501(c)(3) status must serve charitable purposes exclusively, meaning that they cannot serve private interests. As such, all earnings and assets must be used towards charitable purposes only.
What are the Benefits of Obtaining 501(c)(3) Status?
Nonprofits that have 501(c)(3) status can say that donations made to them are tax deductible. This ability is incredibly beneficial when it comes to fundraising that targets corporations and high net worth individuals.
Conclusion
Obtaining 501(c)(3) status offers several benefits to designated organizations and the people they serve. 501(c)(3) organizations are exempt from federal corporate income tax and its donors are able to claim a tax deduction for their contributions. However, due to their heavily regulated nature, 501(c)(3) organizations have several compliance requirements that organizations must consider.
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The information provided on our blog is not legal advice and should not be relied upon as legal advice. Anyone reviewing this post should use it as only a first step in understanding how a 501(c)(3) works. You should consider consulting with a lawyer when obtaining and complying with 501(c)(3) status.
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