Many nonprofits that are coveredbySection 501(c)of the Internal Revenue Code are 501(c)(3) organizations. This is the most commontype of organization, and it can be a charitable nonprofit, a public nonprofit, or simply a charity.
Many of these organizationsreceive an exemption from federal taxes, but they must apply for 501(c)(3) status and they must qualify. And not all nonprofits are tax-exempt.
What Is a 501(c)(3) Organization?
An organization must serve one or more purposes to achieve tax exemption as a501(c)(3) nonprofit. Acceptable purposes include:
- Charitable
- Religious
- Educational
- Scientific
- Literary
- Testing for public safety
- Fosteringamateur sports competition
- Preventingcruelty to children or animals
These organizations must further be able to explain how they serve the public good. They must establish that they're organized and operated for a specific approved purpose. Some examples of the specific goals of 501(c)(3) organizations that have been cited by the IRS include:
- Relief of the poor, the distressed, or the underprivileged
- Advancement of religion
- Advancement of education or science
- Erection or maintenance of public buildings, monuments, or works
- Lessening the burdens of government
- Lessening of neighborhood tensions
- Elimination of prejudice and discrimination
- Defense of human and civil rights secured by law and
- Combating community deterioration and juvenile delinquency
Qualifying organizations for the charitable designationinclude nursing homes, parent/teacher associations, charitable hospitals, some schools, the Red Cross, the Salvation Army, and churches.
- Alternate name: Nonprofit
How Does Tax Exemption Work?
The tax exemption granted to these organizations allows them to receivegrants from private foundations and from the government. They can provide tax deductions to individual donors and can receive special postage rates, nonprofit advertising rates, and other discounts.
Tax exemption also provides limited protection from lawsuits. A charitable organization usually incorporates before seeking tax exemption, so lawsuits can only apply to its corporate assets. Staff and board members enjoy legal protection, although that protection might not cover all situations.
Types of 501(c)(3) Organizations
There are two basic types of 501(c)(3) organizations. One is a public charity which the IRS defines as “not a private foundation.” Public charities receive most of their income from the general public or from the government. Public support must be broad rather than limited to just a few individuals or families.
The second category is a private foundation. Foundations receive their income from investments and endowments rather than from the general public.
Disadvantages of 501(c)(3) Organizations
Nonprofit status isn't right for every organization. Income-producing activities not related to the group’s nonprofit purpose are limited.
Note
The IRS examines unrelated incomeand a nonprofit might have to pay taxes and penalties if it's large.
After paying creditors, a nonprofit must giveits remaining assets to another exempt organization if it closes.
Requirements for 501(c)(3) Tax-Exempt Status
A 501(c)(3) organization must meet several additional requirements to receive the benefits of tax exemption, including being operated solely for exempt purposes. The organization can't be operated for the benefit of any private interest; its net earnings can't benefit any private shareholder or individual. Nonprofits can make a profit,but that profit must support only charitable purposes.
How to Apply for 501(c)(3) Status
You should incorporate as a nonprofit in your state first, but you also have the option of becoming anunincorporated nonprofit association.
You can then use one of two possible applications to apply for tax-exempt status. Most nonprofits useForm 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. But you might qualify to use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code if your organization is small.
Note
You can determine if you qualify for this easier, streamlined option by filling out the eligibility worksheet.
FileIRS Form 1023or 1023-EZ within 27 months to receivetax exemptiondating from the date of yourincorporation. Your exemption will only be valid from the application's postmark date if you wait any longer.
Note
You can file for an extension of the 27-month deadline by explainingwhy you failed to complete the 1023 application process on time. Theinstructions for Form 1023 list acceptable reasons for late filing, including bad advice or inadequate information from a lawyer, accountant, or IRS employee.
Three groups are not required to file Form 1023:
- Churches
- Public charities thatdon't have gross receipts of more than $5000in each year
- Subordinate organizations that are exempt under a group exemptionletter
Key Takeaways
- A 501(c)(3) organization is a nonprofit that enjoys special, tax-exempt status.
- These organizations are obligated to serve the public good.
- Nonprofits can receive grants from the government and from private foundations due to their tax-exempt status, and they receive several discounts as well, from postage to advertising rates.
- The organization can’t be operated for the benefit of any private interest.
This article is provided solely for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant for advice.
FAQs
This exemption, known as the Welfare Exemption, is available to qualifying organizations that have income-tax-exempt status under Internal Revenue Code section 501(c)(3) or 23701(d) of the Revenue and Taxation Code and are organized and operated exclusively for religious, charitable, scientific, or hospital purposes.
What is the difference between a nonprofit and a 501c3? ›
Actually, no! These terms are often used interchangeably, but they all mean different things. Nonprofit means the entity, usually a corporation, is organized for a nonprofit purpose. 501(c)(3) means a nonprofit organization that has been recognized by the IRS as being tax-exempt by virtue of its charitable programs.
How do you determine if an organization is a 501c3? ›
The IRS maintains an “Exempt Organizations Select Check Tool” (available at https://www.irs.gov/charities-non-profits/exempt-organizations-select-check ), which enables a user to search for organizations to determine their eligibility to receive tax-deductible charitable contributions.
What are the IRS exemption requirements to be a 501(c)(3) organization? ›
Exemption Requirements - 501(c)(3) Organizations
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.
What is a 501(c)(3) organization defined as? ›
501(c)(3) organizations are nonprofit groups with a dedicated mission. Most people are familiar with them as churches and charities but they also include private foundations. They receive favorable tax treatment, such as avoiding federal income and unemployment taxes, as long as they operate to support their mission.
Can a 501c3 make a profit? ›
The same is true when it comes to operating a nonprofit as well. So, yes, 501(c)3 organizations (as well as other categories of nonprofits) are allowed to make a profit. And as long as it comes from activities related to their stated mission and purpose, those profits are tax-exempt.
How much can a nonprofit make before filing taxes? ›
Nonprofits with annual revenue of less than $200,000 and assets valued at less than $500,000 may file the Form 990-EZ, or may elect to file the Form 990. Nonprofits with annual revenue of $500,000 or more must file the Form 990.
Is a non profit automatically a 501c3? ›
Actually, no! These terms are often used interchangeably, but they all mean different things. Nonprofit means the entity, usually a corporation, is organized for a nonprofit purpose. 501(c)(3) means a nonprofit organization that has been recognized by the IRS as being tax-exempt by virtue of its charitable programs.
Does a 501c3 need a CEO? ›
Whether an organization requires a CEO or an Executive Director to lead their organization often depends on the culture of the nonprofit Board, and if they themselves are setting the full mission, vision, values, and strategy for the organization.
What are some specific examples of things a non-profit 501(c)(3) cannot engage in if they want to keep their IRS status? ›
6 Types of 501c3 Violations
- Private Benefit & Inurement. 501c3 rules can be broken in cases where an individual is unfairly benefiting from the organization's operations. ...
- Excessive Lobbying. ...
- Political activity. ...
- Unrelated Business Income. ...
- Failure to Submit Annual Reports. ...
- Operation in accord with stated exempt purpose(s)
How much is the user fee for an exemption application? The user fee for Form 1023 is $600. The user fee for Form 1023-EZ is $275. The user fees must be paid through Pay.gov when the application is filed.
What makes a person tax-exempt? ›
Who Does Not Have to Pay Taxes? Generally, you don't have to pay taxes if your income is less than the standard deduction, you have a certain number of dependents, working abroad and are below the required thresholds, or are a qualifying non-profit organization.
When would a 501 c exempt organization not be required to file a form 990 or 990 ez as its annual return? ›
Tax-exempt organizations that have annual gross receipts not normally in excess of $25,000 are not required to file the annual information return, but may be required to file an annual electronic notice (e-Postcard) Form 990-N.
What is the owner of a 501c3 called? ›
A nonprofit corporation has no owners (shareholders) whatsoever. Nonprofit corporations do not declare shares of stock when established.
What are the three main categories of 501 C )( 3 organizations? ›
In general, there are three types of entities that are eligible for 501(c)(3) status: charitable organizations, churches/religious entities, and private foundations.
Who is the owner of a 501c3? ›
No one. A major misconception about nonprofit organizations concerns ownership of a nonprofit. No one person or group of people own a nonprofit organization. Ownership is the major difference between a for-profit business and a nonprofit organization.
What qualifies as a not-for-profit? ›
What Does Not for Profit Mean? Not-for-profit organizations do not earn profits for their owners. All of the money earned by or donated to a not-for-profit organization is used in pursuing the organization's objectives and keeping it running; income is not distributed to the group's members, directors, or officers.
How much money can a nonprofit have in the bank? ›
The short answer is that there is no limit to the amount of money nonprofits can keep in reserves. As long as it can be proved that funds are being used to advance the nonprofits' mission, then the money can be directed as the nonprofit wishes.
Can you fundraise if you are not a nonprofit? ›
To perform a fundraising campaign for a charitable cause, you don't always need to be registered by 501(c)(3). Even if you can accept donations without being a nonprofit, all you need is a valid reason. There are additional ways to accept donations without being a nonprofit, aside from the tax exemption.
