Are you considering making a tax deductible charitable donation in the near future? Make sure that the cause you are donating to is sponsored by a 501(c)(3) organization such as Giving Center so your generous donation meets the deductibility requirements.
Section 501(c)(3) is the part of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations, more specifically those that are viewed as public charities, private foundations or private operating foundations. They are regulated and administered by the US Department of Treasury through the Internal Revenue Service (IRS).
Qualifying Entities
Who can become a 501(c)(3) organization? Organizations that may seek 501(c)(3) determination from the IRS include corporations, trusts, community chests, LLCs1, and unincorporated associations. The majority of 501(c)(3) organizations are nonprofit corporations.
Provisions Unique to 501(c)(3)
One of the distinct provisions unique to Section 501(c)(3) organizations when being compared with other tax exempt entities is the tax deductibility of donations. This means entities that are listed in this category are able to provide donors, who make charitable contributions, with a tax deduction for federal income tax purposes.
Other unique provisions vary by state. Just like with federal law, most states allow for deductibility for state income tax purposes. Many states also allow 501(c)(3) organizations to be exempt from sales tax on purchases, and even exemption from property taxes.
Purpose Limitations
To qualify as a 501(c)(3) organization, a nonprofit must exist for one or more charitable purposes:
- Religious
- Charitable
- Educational
- Scientific
- Literary
- Testing for Public Safety
- Fostering of national or international amateur sports, and
- Prevention of cruelty to animals and children
Types of 501(c)(3) Organizations
501(c)(3) organizations will fall into one of three categories: public charities, private foundations, and private operating foundations.
Public charity. Public charities, like Giving Center, are what most people will recognize as organizations with active programs. Some examples include churches, animal welfare agencies, educational organizations, etc. They usually receive a large portion of their revenue from the general public or from the government. In order to remain a public charity, a 501(c)(3) must acquire at least 1/3 of its donated revenue from public support. Support can be from individuals, companies and/or other public charities. Generous donations to public charities can be tax deductible to the individual donor up to 60% of the donor’s income. Corporate limits are usually 10%. Additionally, public charities have to maintain a governing body that is mostly made up of independent, unrelated individuals.
Private foundation. A private foundation can often be referred to as a non-operating foundation, as they typically don’t have active programs. They are not required to be publicly supported. That means revenue may come from a relatively small number of donors, even single individuals or families. Private foundations are usually thought of as nonprofits which help support the work of public charities through grants, though that may not always be the case. Donations to private foundations can be tax deductible up to 30% of the donor’s income. Governance of private foundations can be more closely held than in a public charity.
Private operating foundation. This category is the least common. These organizations will often maintain active programs similar to public charities, but may have some attributes (such as close governance) similar to a foundation. With this in mind, private operating foundations are often considered hybrids. Most of the earnings have to go to the conduct of programs. Furthermore, donation deductibility is similar to a public charity.
Restrictions on Activities
501(c)(3) organizations are highly regulated. Strict rules apply to both the activities and the governance of these entities. No part of the activities or net earnings may unfairly benefit any director, officer, or any private individual.
Moreover, all assets are permanently dedicated to a charitable purpose. In the event that a 501(c)(3) organization must halt operations, all assets remaining after debts are collected must be distributed for charitable purposes.
Lobbying, propaganda, or other legislative activity must be kept relatively insubstantial. Any intervention in political campaigns or the endorsement/anti-endorsement of candidates for public office is prohibited.
Ongoing Compliance
Having a 501(c)(3) status comes with requirements at both the state and federal level. Annual filing requirements include a corporate annual report, IRS Form 990, and state charitable solicitations registration and renewal.
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