What is a 501(c)(3) Organization?
A 501(c)(3) organization is a non-profit that falls within the category of religious, charity, or education. Organizations that are granted this designation are not allowed to participate in lobbying, but are exempt from paying taxes. Not all non-profit organizations are 501(c)(3) designated and most that are not do no have tax-exempt status.
Other designations for non-profit organizations include:
- 501(c)(1), which applies to corporations organized ‘under act of congress’
- 501(c)(2), which applies to title holding corporations for exempt organizations
- 501(c)(4), which applies to civic leagues, social welfare organizations and local employee associations
- 501(c)(5), which applies to labor, agricultural, and horticultural organizations
- 501(c)(6), which applies to business leagues, chambers of commerce, and real estate boards, among others
- 501(c)(7), which applies to social and recreational clubs
- 501(c)(8), which applies to fraternal beneficiary societies and associations
- 501(c)(9), which applies to voluntary employee beneficiary associations
- 501(c)(10), which applies to domestic fraternal societies and associations
- 501(c)(11), which applies to teachers’ retirement fund associations
- 501(c)(12), which applies to benevolent life insurance associations, mutual ditch or irrigation companies, and mutual or cooperative telephone companies, among others
- 501(c)(13), which applies to cemetery companies
- 501(c)(14), which applies to state-chartered credit unions and mutual reserve funds
- 501(c)(15), which applies to mutual insurance companies or associations
- 501(c)(16), which applies to cooperative organizations to finance crop operations
- 501(c)(17), which applies to supplemental unemployment benefit trusts
- 501(c)(18), which applies to employee funded pension trusts created prior to June 25, 1959
- 501(c)(19), which applies to post or organizations of past or present members of the armed forces
- 501(c)(21), which applies to black lung benefit trusts
- 501(c)(22), which applies to withdrawal liability payment funds
- 501(c)(23), which applies to veterans’ organizations created prior to 1880
- 501(c)(25), which applies to title holding corporations or trusts that have multiple parent corporations
- 501(c)(26), which applies to state-sponsored organizations that provide health coverage to high-risk individuals
- 501(c)(27), which applies to state-sponsored workers’ compensation reinsurance organizations
- 501(c)(28), which applies to national railroad retirement investment trusts
- 501(c)(29), which applies to cooperative health insurance issuers
While some of these are also tax exempt, many are considered non-profit organizations however they still are required to pay taxes like for-profit organizations.
Here is an article about different 501(c) organizations.
Who Qualifies for 501(c)(3) Status
A 501(c)(3) organization is a non-profit organization that is considered ‘charitable’ and generally public, though some private organizations can qualify. The categories for 501(c)(3) status include, but are not limited to:
- Amateur sports
- Charitable organizations
- Prevention of cruelty
- Public safety
Organizations within these categories can apply for 501(c)(3) tax-exempt status and organizations outside of these are invited to apply as well. The IRS reviews applications to determine whether or not a specific organization meets the requirements to be classified under a specific designation and whether they are considered tax-exempt.
Here is an article about what qualifies for 501(c)(3) status.
Not all organizations within these categories qualify, however. There are additional requirements that must be met including:
- Organization must not praise or advocate for discrimination
- Must provide a reason for tax exemption status
- Must achieve official status
- Must be in existence for at least three years prior to application
- Any funds or earnings of the organization cannot be used to benefit a single member
- Any profits raised through the organization must be used for charitable actions
- No political involvement is allowed
- Must meet public needs
- Must complete required paperwork, including financial records
Here is an article about 501(c)(3) requirements.
Examples of 501(c)(3) Organizations
There are a number of different organizations out there that are considered 501(c)(3). In fact, chances are you interact with several of them in your normal life, whether you choose to support them or not.
Public charities are some of the most common types of 501(c)(3) organizations. The rule for these is that they must receive no more than 1/3 of their income from unrelated commercial activities and/or investments. These types of charities include:
- The United Way
- American Red Cross
- American Cancer Society
- Special Olympics
While most 501(c)(3) organizations are considered ‘public’ there are many private foundations or private operating foundations that can be considered under this classification as well. These foundations are sponsored by private and public sources. Not all private foundations qualify for 501(c)(3) status. Some that do include:
- Bill and Melinda Gates Foundation
- GlaxoSmithKline Patient Access Programs Foundation
- Ford Foundation
- Carnegie Corporation
- Paul Getty Trust
- David and Lucile Packard Foundation
- Scoliosis Research and Education Foundation
Scientific & Literary Organizations
These include organizations that contribute to the public interest, such as:
- American Chemical Society
- Council of Literary Magazines and Presses
This category is quite broad as it encompasses most schools including colleges, universities, professional schools, trade schools and even technical academies. It also includes:
- Online schools
- Symphony orchestras
Here is an article about some of the different types of 501(c)(3) organizations.
What Makes a Nonprofit a 501(c)(3)?
A nonprofit organization is considered a 501(c)(3) if they receive this designation from the IRS. Receiving the designation means that the organization has applied and been approved as:
‘An organization organized and operated exclusively for exempt purposes … [where] none of its earnings may inure to any private shareholder or individual.’
To qualify for exemption the organization must also fall under one or more of the required designations such as educational, literary, or religious organizations, public charities, or private foundations.
Here is an article about what it means to be a 501(c)(3) organization.
Benefits of Being a 501(c)(3)
There are several benefits to being a 501(c)(3) which include:
- Benefit 1 : Exempt from federal income taxes
- Benefit 2 : Contributions are tax deductible
- Benefit 3 : Exempt from state, sales, and employment taxes (possibly)
- Benefit 4 : Reduced rates for postage
- Benefit 5 : Exempt from federal unemployment taxes
- Benefit 6 : Financing is tax-exempt
- Benefit 7 : Enhanced credibility of the organization
- Benefit 8 : Eligibility for grants at all government levels
Here is an article about some of the benefits and drawbacks of 501(c)(3) status.
Organizations that wish to apply for 501(c)(3) status may do so by filling out the 501(c)(3) application through the IRS website. Applications are required to be submitted through the electronic system and do require a user fee in order to complete.
The 501(c)(3) application cost can be high for some charitable organizations, but allows these organizations to achieve the designation necessary to be considered tax exempt. Working with nonprofit lawyers can help with the entire process and ensure that the fees paid are accurate.
Step-by-step instructions are provided to ensure organizations know what they need to do to complete the application. This includes a charitable pledge agreement that stipulates the organization is designed to provide a charitable service.
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