What is an 501(c)(3) organization?

Section 501(c)(3) is a part of the U.S. Internal Revenue Code (IRC) and a particular tax category for non-profit organizations. Organisations that satisfy the Section 501(c)(3) specifications are not subject to federal tax. Although the Internal Revenue Service (IRS) indeed recognizes more than 30 kinds of non-profit organizations, only those who meet the requirements to be granted 501(c)(3) status can claim that their donations can be tax-deductible. 1

The majority of organizations that are qualified to be eligible for 501(c)(3) designation are classified into any of the following categories that include churches, charitable organizations and religious organizations, as well as private foundations. 2 The regulations are outlined under section 501(c)(3) are enforced through IRS, the U.S. Treasury through the IRS.

Key Takeaways

  • Section 501(c)(3) constitutes a section of the U.S. Internal Revenue Code (IRC) and is a distinct tax category for non-profit organizations.
  • Organisations that meet Section 501(c)(3) requirements can be exempted from Federal income tax.
  • Although there is no doubt that IRS acknowledges over 30 kinds of non-profit organisations, only those which are eligible to be granted 501(c)(3) status can claim that their donations can be tax-deductible.
  • 501(c)(3) organizations must pay their employees at least fair prices for their wages.
  • To qualify for tax treatment, the non-profit organization must adhere to its primary objective or mission.

Different types of 501(c)(3) Organizations

501(c)(3) organizations are classified into three main categories: public charities, private foundations and private operating foundations.

The public charity. Public charities are what people consider to be those with programs that are active. Examples include benevolence and church organizations as well as animal welfare organizations as well as educational institutions. They typically receive a significant part of their revenue either from people in general or the government.

To remain an official charity (and is not considered a private foundation), an 501(c)(3) must receive at the least 1/3 of its donations income from public support. May come from companies, individuals and/or other public charities.

Donations to charities that are public can be tax-deductible to the donor’s personal income up to 60 percent of the donor’s income 2. The corporate limits are typically 10 percent. Additionally, public charities have to maintain the governing bodies that are predominantly composed of people who are independent and unrelated to each other. 4..

Foundations that are private. A private foundation is commonly described as a non-operating foundation because they usually do not have programs in operation. They do not have to be supported by the public, and the funds may come from a very small number of donors, including single families or individuals.

Private foundations are generally classified as non-profit organizations that help public charities by providing grants. However that’s not the norm. Donations to private foundations may be tax-deductible to the donor’s individual up to 30 percent of the income. The governance of private foundations is more tightly controlled than the public sector. The family foundation can be an illustration private foundations.

Private Operating Foundation. The third category is the least popular privately operating foundation. These foundations typically run programs that are similar to public foundations, however they may also have features (such as close-governance) that are similar to foundations. Therefore private foundations operate as typically referred to as hybrids. Most of the profits will be used for the operation of the programs. Donation deductions are similar to the tax deduction for a public charity.

Restrictions on Activities

501(c)(3) organisations are heavily restricted organizations that are highly regulated. Rules that are strict apply to the operations and the management of these organisations. None of the functions or net profits will be used to benefit unfairly any officer, director or private person.

Additionally that all assets are allocated to charitable purposes. If the 501(c)(3) company has to stop operation, all purchases left after debts have been paid must be re-allocated to the charitable cause.

Additionally, lobbying, propaganda, or other legislative activities must be restricted to a minimal level of five. Intervention in political campaigns or the endorsement/anti-endorsement of candidates for public office is strictly prohibited.

In obtaining 501(c)(3) Status

For a business or any other qualified entity to obtain 501(c)(3) designation, it must apply to the IRS for recognition through making an application on Formula 1023 (or Form 1023-EZ) or the Application to Recognize Tax Exemption. The application requires a comprehensive analysis of the structure of the company management, governance and programs.

Continuous Compliance

The granting of 501(c)(3) status is a requirement for compliance at the federal and state level. The requirements for annual filings include an annual corporate document, IRS Form 990, and registration for state-wide charitable solicitations as well as renewal.

Requirements for the 501(c)(3) organization

To be tax-exempt as per subsection 501(c)(3) in the Internal Revenue Code, an organization must be registered and managed solely for exemption purposes as defined under section 501(c)(3) and no of its revenues can be distributed to any shareholder of a private company or any individual. Furthermore, it should never be an action-oriented organization ,i.e. , it cannot attempt the influence of legislation for a significant element of its work and is not permitted to be involved in any political activity either for or against candidates for office.

The organizations listed by Section 501(c)(3) are often known as charity organizations. In addition to the testing of public safety agencies, organizations described by section 501(c)(3) can be eligible to receive tax-deductible contributions as per Code article 170.

The company cannot be created or operated to benefit personal interests, and no portion of an article 501(c)(3) company’s net income could be distributed to the benefit of anyone, whether private or otherwise. Suppose the company is involved in an extra benefit transaction with an individual who has significant influence over the company or its management. In that case, the organization could be subject to an excise tax that can impose on the individual and the organization’s managers that agree to the arrangement.

Section 501(c)(3) organizations are limited in terms of they can engage in legislative and political ( lobbying) actions they can engage in. For a more detailed explanation of these activities, refer to activities for lobbying and politics. For more information on the activities of charities to lobby, read the article