501(c) Designation Qualifications
The 501(c) designation is an IRS tax code designation for a non-profit organization that receives some exemption from federal taxation. State taxation generally follows the same criteria as the federal government for tax exemption. This designation appears in Title 26, Subtitle A Chapter 1, Subchapter F, Section 501 of the Internal Revenue Code.
What are some organizations exempt from taxation?
The law states that any corporation, fund or foundation organized exclusively for religious, charitable, scientific, public safety, literary or educational purposes, amateur sports or prevention of cruelty to children and animals is exempt from taxation so long as no individual or shareholder derives a personal profit from the operation of the organization. This designation is known as 501(c)(3). Chambers of commerce, labor, real estate boards and professional football leagues are among many other organizations that qualify for 501(c)(4-7) classification. Fraternal organizations and retirement funds may also be tax exempt if they are for the sole benefit of the dependants. These organization are covered in 501(c)(8 – 12). Several other narrow classifications exist for retirement and benefit trusts.
Nonprofit public charities must not:
- Generate personal profit or any other benefit for individuals, shareholders
- Engage in political campaigns, including endorsing candidates or influencing legislation
- Organizations may engage in voter education, registration and get out and vote drives so long as they are non-partisan in nature.
- Large nonprofits may expend up to a million dollars to lobby for legislation but they must also declare this to the IRS.
- Maintain records of finances for public inspection
- Allow for taxation on unrelated business income
- File Form 990 (Return of Organization Exempt From Income Tax)
- All nonprofits with at least $500,000 in total assets must file this form
- o Failure to file this form may result in penalties of up to $250,000 and loss of exemption
What is the difference between public charities and private foundations?
The IRS distinguishes public charities as organizations that receive a substantial portion of its income from public donors and the government. There must be a plurality of public donors and not a few individuals. Private foundations on the other hand are generally supports by a few individuals. Sec 509 of the Internal Revenue Code defines a private foundation as receiving a third of its yearly taxable support from a combination of gifts, grants, contributions or membership fees as well as gross receipts from admissions, sales of merchandise, performance of service of the furnishing of facilities. Private foundations generally do not solicit funds from the public. Unlike public charities, private foundation may not lobby on behalf of legislation at any time.
How does an organization obtain 501(c)(3) status?
Most organizations seeking tax empty status must fill out IRS Form 1023. There are filing fees of $875 for organizations grossing $10,000 or more. The fee is reduced to $400 if the organization grosses less than the $10,000 threshold. Houses of worship and organizations receive automatic exemption without filing Form 1023.