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About: Department of Treasury (IRS)
Exemption Requirements - 501(c)(3)
Organizations Department of Treasury (IRS)
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. In addition, it may not be
an action organization, i.e., it may not attempt to influence legislation as
a substantial part of its activities and it may not participate in any
campaign activity for or against political candidates.
Organizations described in section 501(c)(3) are commonly referred to as
charitable organizations. Organizations described in section 501(c)(3),
other than testing for public safety organizations, are eligible to receive
tax-deductible contributions in accordance with Code section 170.
The organization must not be organized or operated for the benefit of
private interests, and no part of a section 501(c)(3) organization's net
earnings may inure to the benefit of any private shareholder or
individual. If the organization engages in an excess benefit transaction
with a person having substantial influence over the organization, an
excise tax may be imposed on the person and any organization managers
agreeing to the transaction.
Section 501(c)(3) organizations are restricted in how much political and
legislative (lobbying) activities they may conduct. For a detailed
discussion, see Political and Lobbying Activities. For more information
about lobbying activities by charities, see the article Lobbying Issues; for
more information about political activities of charities, see the FY-2002
CPE topic Election Year Issues.
A 501(c) organization. For example, a nonprofit organization may be tax-exempt under section 501(c)(3) if its primary activities are charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, preventing cruelty to children, or preventing cruelty to animals. A 501(c)(3) organization is a corporation, trust, unincorporated association, or other type of organization that is exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code. It is the most common type of the 29 types of 501(c) nonprofit organizations in the United States. Many charitable non-profits in the United States that Americans commonly know of, and often make donations to, are 501(c)(3) organizations,[according to whom?] ranging from charitable foundations to universities and churches. These organizations must be approved by the Internal Revenue Service to be tax-exempt under the terms of section 501(c)(3) of the Internal Revenue Code. 501(c)(3) tax-exemptions apply to entities that are organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for testing for public safety, or to foster national or international amateur sports competition, or for the prevention of cruelty to children, women, or animals. 501(c)(3) exemption applies also for any non-incorporated community chest, fund, cooperating association or foundation that is organized and operated exclusively for those purposes. There are also supporting organizations—often referred to in shorthand form as "Friends of" organizations. 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 to be allowed (e.g., receipts for donations over $250). Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging if not fatal to a charity's continued operation, as many foundations and corporate matching programs do not grant funds to a charity without such status, An approved 501(c)(3) exemption allows donors to the organization to reduce their own taxable incomes by deducting the amounts of their donations given, and thus to reduce their personal income taxes, and it allows the 501(c)(3) organization to avoid federal income taxes on the difference between revenues (donations, grants, service fees) received vs. expenses (wages, supplies, state and local taxes paid, etc.) in its main operations. In a for-profit business, that difference would represent taxable income and be taxed at federal corporate tax rates of 15 to 39 percent. Organizations with 501(c)(3) status may also be exempt from state and local corporate income taxes, which generally range from 0 to 12 percent. Foreign subsidiaries If a 501(c)(3) organization sets up and controls a foreign subsidiary in order to facilitate its charitable work in a foreign country, then donors' contributions to the 501(c)(3) organization are tax-deductible even if they are intended to fund the charitable activities in the foreign country. If a foreign organization sets up a 501(c)(3) organization for the sole purpose of raising funds for the foreign organization, and the 501(c)(3) organization sends substantially all contributions to the foreign organization, then donors' contributions to the 501(c)(3) organization are not tax-deductible to the donors.