Are you interested in learning what a What is a 501(c)(3) organization is? If so you are in the right place and this article will help you! There are a number of different designations in the U.S. tax code that permit outright tax exemption or special consideration for entities in the United States, one of which is a 501(c)(3) organization. Understanding these differences and subtle shades of meaning can assist individuals who either seek to work with or to begin their organization. The organizations operating under the aforementioned designation must meet specific criteria in order to maintain their eligibility.
What 501(c)(3) Means
In the law, there are a number of 501(c) statutes that outline privileges, exceptions, and specifications about taxation for organizations, all of which are administered by the United States Treasury via the Internal Revenue Service (IRS). There are a number of bodies that may qualify for the exemptions outlined by the statute—community chests, corporations, LLCs, trusts, and unincorporated associations. However, the majority of groups that apply for the status are non-profit organizations.
Given that there are more than 20 statutes under the general 501(c) heading, what makes (3) unique? Why do non-profit organizations typically seek this status? The key is in the details. In addition to providing a generalized tax-exempt status, this specific code provides entities with the ability to deduct the number of charitable donations. This provision mirrors federal law that allows individuals to claim donated sums as deductions on their tax returns.
What 501(c)(3) Organization can apply?
According to the Foundation Group, there are several types of groups that may qualify as a 501(c)(3) organization. The first is a public charity, which is defined by the IRS as a group that is not a private foundation. While private foundations and private operating foundations are also considered to be a part of this select group, there is a detailed expectation that charities obtain at least one-third of their donations from a broad base. Some well-known examples include the American Heart Association, the American Civil Liberties Union, and the American Humane Society.
Rather than soliciting contributions from a known or registered pool of donors, charities often cast a much wider net. They may keep databases of known donors, but even such collections span demographics and socioeconomic statuses. For clarity, consider a spectrum with public charities at one end and private foundations at the other. In between, a private operating foundation serves as a type of hybrid. While these groups do solicit donations from the public, their administration is closely held, and much of the funding they receive goes to the running of specially designed programs based on the organization’s mission.
To maintain tax-exempt status, these groups must abide by certain restrictions. Since the IRS closely monitors its activities, it is necessary for each entity to ensure that publicly sourced funds do not overtly enrich any individual or administrator of the group. They are also forbidden from openly exerting political influence or participation in a specific campaign for a candidate to any office.
While any qualifying organization is welcome to apply for this exemption status, there are rules, as mentioned above. Non-compliance results in immediate loss of exemption status. As an additional hedge against corruption, these charities and entities must reapply each year by filling out one of several versions of Form 990 during tax assessment season. This ensures that any 501(c)(3) organization maintains its current status and continues to abide by its originally stated mission.