501(c) is a provision of the United States Internal Revenue Code (26 U.S.C. § 501(c)), listing twenty-seven types of non-profit
organizations exempt from some Federal income taxes. Sections 503 through 505 list
the requirements for attaining such exemptions. Many states reference Section 501(c) for definitions of organizations exempt from
state taxation as well.
Types
The types of 501(c) organizations are:
- 501(c)(1) — Corporations organized under acts of Congress such as Federal Credit
Unions
- 501(c)(2) — Title holding corporations for exempt organizations
- 501(c)(3) — Various charitable, non-profit, religious, and educational organizations (see
below)
- 501(c)(4) — Various political education organizations (see below)
- 501(c)(5) — Labor Unions and Agriculture
- 501(c)(6) — Business league and chamber of commerce organizations (see below)
- 501(c)(7) — Recreational club organizations
- 501(c)(8) — Fraternal beneficiary societies
- 501(c)(9) — Voluntary employee beneficiary associations
- 501(c)(10) — Fraternal lodge societies
- 501(c)(11) — Teachers' retirement fund associations
- 501(c)(12) — Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies and like
organizations
- 501(c)(13) — Cemetery companies
- 501(c)(14) — Credit Unions
- 501(c)(15) — Mutual insurance companies
- 501(c)(16) — Corporations organized to finance crop operations
- 501(c)(17) — Employees' associations
- 501(c)(18) — Employee-funded pension trusts created before June 25, 1959
- 501(c)(19) — Veterans' organizations
- 501(c)(20) — Group legal services plan organizations
- 501(c)(21) — Black lung benefit trusts
- 501(c)(22) — Withdrawal liability payment fund
- 501(c)(23) — Veterans' organizations created before 1880
- 501(c)(25) — Title-holding corporations for single parents
- 501(c)(26) — State-sponsored high-risk health coverage organizations
- 501(c)(27) — State-sponsored workers' compensation reinsurance organizations
- 501(c)(28) — National railroad retirement investment trust
General compliance issues
Under IRC Section 511, a 501(c) organization is subject to tax on its " unrelated business income", whether or not the organization actually makes a profit, but
not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games.[1] Disposal of donated goods valued over $2,500, or acceptance of
goods worth over $5,000 may also trigger special filing and record-keeping requirements.
Note that "tax exempt" also does not excuse an organization from maintaining proper records and filing any required annual or
special-purpose tax returns.[2] However, annual returns are not generally required from an exempt organization accruing less than
$25,000 in gross income yearly.[3]
Failure to file required returns — such as the Form 990 Return of Organization Exempt From Income Tax — may result in
monetary fines of up to $250,000 per year. Exempt or political organizations (excluding churches or similar religious entities)
must make their returns, reports, notices, and exempt applications available for public inspection.
The exempt organization filed IRS Form 990 (or similar such public record as the Form 990-EZ or Form 990-PF) are generally
available for public inspection and photocopying at the offices of the exempt organization, through a written request and payment
for photocopies by mail from the exempt organization, or through a direct Form 4506-A Request for Public Inspection or Copy or
Political Organization IRS Form request to the IRS of the exempt organization filing of Form 990 for the past three tax
years. The Form 4506-A also allows the public inspection and/or photocopying access to Form 1023 Application for Recognition
of Exemption or Form 1024, Form 8871 Political Organization Notice of Section 527 Status, and Form 8872 Political
Organization Report of Contribution and Expeditures.
Failure to timely file such returns and to make other specific information available to the public is also prohibited.[4]
501(c)(3)
Section 501(c)(3) is a tax law provisions granting exemption from the federal income
tax to non-profit organizations. This exemption does not cover other federal taxes such as employment taxes.
501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively
for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty
to children or animals.
Another provision, 26 U.S.C. § 170, provides a deduction,
for federal income tax purposes, for some donors who make charitable
contributions to most types of 501(c)(3) organizations, among others. Regulations specify which such deductions must be
verifiable in order to be allowed (e.g., receipts for donations over $250).
Testing for public safety is described under section 509(a)(4) of the code which makes the organization a public charity and
not a private foundation, but contributions to 509(a)(4) organizations are not deductible by the donor for federal income,
estate, or gift tax purposes.
The three principal classifications of 501(c)(3) organizations are as follows:
A public charity, identified by the Internal Revenue Service (IRS) as "not a private foundation," normally receives a substantial
part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly
broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections
509(a)(1) through 509(a)(4).
A private foundation, sometimes called a non-operating foundation, receives most
of its income from investments and endowments. This income is used to make grants to other organizations, rather than being
disbursed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a)
as 501(c)(3) organizations which do not qualify as public charities.
A private operating foundation is a private foundation that devotes most of its earnings and assets directly to the conduct of
its tax exempt purposes, rather than to making grants to other organizations for these purposes. Private operating foundations
are defined in the Internal Revenue Code under section 4942(j)(3).
Charitable deductions
A church is not required to become a 501(c)(3) to accept donations. If a church files to become a 501(c)(3) then it has become
a "state church" and is regulated under the paragraphs below.
Under IRC Section 170, individuals giving to 501(c)(3) organizations that are either public charities, private operating
foundations, and certain private foundations may deduct contributions representing up to 50% of the donor's adjusted gross income
if the individual itemizes on his tax returns. Individuals giving to 501(c)(3) organizations that are private foundations may
generally deduct contributions representing up to 30% of their adjusted gross income. Corporations may deduct all contributions
to 501(c)(3) organizations (regardless of foundation status) up to an amount normally equal to 10% of their taxable income.
501(c)(3) status for charities and the related section 170 deduction for donors are important to many charitable groups. Some
individuals and groups (and virtually all foundations) will not give to a charity if it does not have 501(c)(3) status (as no tax
deduction would be allowed). Therefore, loss of this status can be harmful (if not fatal) to a charity's existence.
Obtaining 501(c)(3) status
Some organizations automatically acquire 501(c)(3) status upon filing of proper organic documents (e.g., articles of
incorporation as a church), at least until annual income exceeds a statutory threshold. Others will not receive 501(c)(3) status
until they file an application and supporting documentation to the IRS and have a certification letter issued. The IRS will
examine the application and may request further financial and organization information prior to granting the 501(c)(3) status. To
cover donations made before the letter is issued, the regulations require prompt filing of the application after organization, or
after an existing organization satisfies the criteria for 501(c)(3), or after exceeding the income threshold. Contrarily, any
organization may instantaneously lose its status for tax-deductible donations if it violates the pertinent regulations.
Political activity
Organizations with this classification are prohibited from conducting political campaign activities to influence elections to
public office. Public charities (but not private foundations) are permitted to conduct a limited amount of lobbying to influence
legislation. Although the law states that "no substantial part" of a public charity's activities may be devoted to lobbying,
charities with very large budgets may lawfully expend a million dollars (under the "expenditure" test) or more (under the
"substantial part" test) per year on lobbying. [5]
All 501(c)(3) organizations are also permitted to educate individuals about issues, or fund research that supports their
political position without overtly advocating for a position on a specific bill. Think tanks
such as the Cato Institute, Center for
American Progress, and Heritage Foundation and other 501(c)(3) organizations
produce reports and recommendations on policy proposals that do not count as lobbying under the tax code.
Examples of 501(c)(3) organizations
Many 501(c)(3) organizations are part of nonprofit "conglomerates," having organizational control relationships with other
nonprofit organizations. A 501(c)(4) advocacy organization may create a 501(c)(3) that operates solely for "educational"
purposes. The League of Women Voters advocates positions on issues and evaluates
candidates as a 501(c)(4) and uses its 501(c)(3) arm to provide nonpartisan voter information. A 501(c)(6) business league may
create a 501(c)(3) arm to conduct research related to the business focus of the parent organization.
Prominent 501(c)(3) organizations include:
Charity Navigator offers information on more than five thousand 501(c)(3) public
charities.
501(c)(4)
501(c)(4) exemptions are given to civic leagues or organizations not organized for profit but operated exclusively for the
promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a
designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable,
educational, or recreational purposes.[6] 501(c)(4)
organizations differ from 501(c)(3) in that they are permitted to lobby for legislation.
The exemption does not apply "unless no part of the net earnings of such entity inures to the benefit of any private
shareholder or individual."[7]
Deductibility of donations to 501(c)(4) organizations
Unlike donations to the more prevalent 501(c)(3) non-profit organizations, donations to a section 501(c)(4) organization are
not deductible by the donor under section 170 of the code unless the recipient organization is a volunteer fire department as
described in revenue ruling 80-77 or veteran organizations with at least 90% of its membership consisting of war veterans as
described in IRS Revenue Ruling 84-140.
Prominent 501(c)(4) organizations
501(c)(6)
The 501(c)(6) is specifically reserved to Chamber of Commerce organizations,
economic development corporations, real estate boards, trade boards, professional football leagues (e.g., the NFL), and
other types of business leagues. They are characterized by a common business interest, which the organization typically promotes.
Organizations under this category are exempt from most federal income taxes. Donations to a 501(c)(6) are not tax deductible as
charitable contributions, as is the case in the 501(c)(3) category.
501(c)(6) organizations may engage in limited political activities that inform, educate, and promote their given interest.
They may not engage in direct expenditures advocating a vote for a political candidate or cause. Donations to 501(c)(6)
organizations are not required to be disclosed.
501(c)(7)
A section 501(c)(7) organization is permitted to receive up to 35% of its gross receipts, including investment income, from
outside of its membership without losing its tax-exempt status.
The existence of private inurement can operate to deprive a social club of its exempt status. The general test is whether the
club generates revenue from non-members, the use of which is redounding to the personal advantage of the members (such as reduced
dues, improved facilities, and the like).
501(c)(10)
501(c)(10) is the Code Section for groups, associations or organizations that operate as a fraternal organization. These groups usually operate as "lodges" or sub-chapters
under the control and/or supervision of a Parent, i.e. the Grand Lodge of .... is the Parent or Controlling organization for a
particular state or region for that particular group or organization.
The tax exempt function is related to the cause that these groups will fund-raise for .. e.g. the Ancient Arabic Order of the Nobles of the Mystic Shrine known as
the Shriners are the fundraisers for the Shriners Hospital for
Children.
While they are a tax exempt organization, the ONLY charitable tax deductible contributions that are allowed MUST be used
exclusively for the support of a recognized IRC 501(c)(3) public charity, which in the case of the Shriners is the Shriners
Hospital for Children, a IRC 501(c)(3) public charity.
Notes
See also
External links
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