ABOUT 501(C)(3) STATUS
Tax exemption
In many countries, nonprofits may apply for tax exempt status, so that the organization itself may be exempt from income tax and other taxes, and (in some cases) so that financial donors may claim back any income tax paid on donations, or deduct from their own tax liability the amount of the donation.
Only limited types of tax exempt, non-profit organizations offer to donors the advantage of deductions for the amount donated.
For a United States analysis of this issue, see 501(c).
In the United States, after a recognized type of legal entity has been formed at the state level, it is customary for the nonprofit organization to seek tax exempt status with respect to its income tax obligations. That is typically done by applying to the Internal Revenue Service (IRS), although statutory exemptions exist for limited types of nonprofit organizations. The IRS, after reviewing the application to ensure the organization meets the conditions to be recognized as a tax exempt organization (such as the purpose, limitations on spending, and internal safeguards for a charity), may issue an authorization letter to the nonprofit granting it tax exempt status for income tax payment, filing, and deductibility purposes. The exemption does not apply to other Federal taxes such as employment taxes. Additionally, a tax-exempt organization must pay federal tax on income that is unrelated to their exempt purpose. Failure to maintain operations in conformity to the laws may result in an organization losing its tax exempt status.
Also in the United States, individual states and localities offer nonprofits exemptions from other taxes such as sales tax or property tax. Federal tax-exempt status does not guarantee exemption from state and local taxes. These exemptions generally have separate application processes and their requirements may differ from the IRS requirements. Furthermore, even a tax exempt organization may be required to file annual financial reports (IRS Form 990) at the state and federal level.
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.
 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 qualified exempt organizations
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
Section 501(c)(3) is a tax law provision 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
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.
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