501(c)

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501(c) is a provision of the United States Internal Revenue Code (26 U.S.C. § 501(c)), listing 27 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.

Contents

[edit] Types

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 non-for-profit 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

[edit] General compliance issues

Under IRS's IRC Section 511, a 501(c) organization is subject to tax on its "unrelated business income," whether or not the organization actually makes a profit, but not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games.[1] Disposal of donated goods valued over $2,500, or acceptance of goods worth over $5,000 may also trigger special filing and record-keeping requirements.

Note that "tax exempt" also does not excuse an organization from maintaining proper records and filing any required annual or special-purpose tax returns.[2] Previously, annual returns were not generally required from an exempt organization accruing less than $25,000 in gross income yearly.[3] However, from 2008 onwards, many such organizations must file a yearly "e-Postcard" or risk losing their exemption [4]

Failure to file required returns such as Form 990 (Return of Organization Exempt From Income Tax) may result in monetary fines of up to $250,000 per year. Exempt or political organizations (excluding churches or similar religious entities) must make their returns, reports, notices, and exempt applications available for public inspection.

The exempt organization filed IRS Form 990 (or similar such public record as the Form 990-EZ or Form 990-PF) are generally available for public inspection and photocopying at the offices of the exempt organization, through a written request and payment for photocopies by mail from the exempt organization, or through a direct Form 4506-A Request for Public Inspection or Copy or Political Organization IRS Form request to the IRS of the exempt organization filing of Form 990 for the past three tax years. The Form 4506-A also allows the public inspection and/or photocopying access to Form 1023 Application for Recognition of Exemption or Form 1024, Form 8871 Political Organization Notice of Section 527 Status, and Form 8872 Political Organization Report of Contribution and Expenditures.

Failure to timely file such returns and to make other specific information available to the public is also prohibited.[5]

[edit] 501(c)(3)

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).

[edit] Charitable deductions

Under IRS's 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.

[edit] Obtaining 501(c)(3) status

Some organizations automatically acquire 501(c)(3) status upon filing of proper organizational 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.

[edit] Political activity

Organizations with this classification are prohibited from conducting political campaign activities to influence elections to public office. Public charities (but not private foundations[citation needed]) are permitted to conduct a limited amount of lobbying to influence legislation. Although the law states that "no substantial part" of a public charity's activities may be devoted to lobbying, charities with very large budgets may lawfully expend a million dollars (under the "expenditure" test) or more (under the "substantial part" test) per year on lobbying. [6]

All 501(c)(3) organizations are also permitted to educate individuals about issues, or fund research that supports their political position without overtly advocating for a position on a specific bill. Think tanks such as the Cato Institute, Center for American Progress, and Heritage Foundation and other 501(c)(3) organizations produce reports and recommendations on policy proposals that do not count as lobbying under the tax code. Another example is the The American Foreign Policy Council is a lobbyist organization operating under this code.

[edit] Relations to other nonprofit organizations

Many 501(c)(3) organizations are part of nonprofit "conglomerates,"[citation needed] having organizational control relationships with other nonprofit organizations. The board of a 501(c)(4) advocacy organization may create a 501(c)(3) that operates solely for "educational" purposes. The League of Women Voters advocates positions on issues and evaluates candidates as a 501(c)(4) and there is a similarly named 501(c)(3) organization, League of Women Voters Education Fund, which provides nonpartisan voter information. The board of a 501(c)(6) business league may create a 501(c)(3) organization with the purpose of conducting research related to the business focus. While 501(c)(3) organizations may be similarly named to other organizations, they cannot be owned by other organizations, and cannot also have private owners. 501(c)(3) organizations should usually be chartered as independent organizations.

[edit] Examples of 501(c)(3) organizations

Prominent 501(c)(3) organizations include:

Charity Navigator offers information on more than 5,000 501(c)(3) public charities and private foundations.

Even some government and/or religious organizations can obtain 501(c)3 status, for example, the University of Tennessee's Christian Student Fellowship.

[edit] 501(c)(4)

501(c)(4) exemptions are given to civic leagues or organizations not organized for profit and operated exclusively for the promotion of social welfare, or local associations of employees. Net earnings are devoted exclusively to charitable, educational, or recreational purposes.[7]

The exemption applies so long as "...no part of the net earnings of such entity inures to the benefit of any private shareholder or individual."[8]

Characteristics that set these organizations apart from a 501(c)(3) non-profit organization include but are not limited to:

  • Limited membership. Examples include limiting membership to the employees of a designated company or persons in a particular municipality or neighborhood.
  • Broader ability to lobby for legislation.

[edit] Deductibility of donations to 501(c)(4) organizations

Unlike donations to 501(c)(3) non-profit organizations, donations to a section 501(c)(4) organization are not deductible by the donor under section 170 of the code unless the recipient organization is either:

  • a volunteer fire department as described in revenue ruling 80-77
  • a veteran organizations with at least 90% of its membership consisting of war veterans as described in IRS Revenue Ruling 84-140.

[edit] Prominent 501(c)(4) organizations

[edit] 501(c)(6)

The 501(c)(6) is specifically reserved to Professional and Trade organizations (Associations and Societies), chamber of commerce organizations, economic development corporations, real estate boards, trade boards, professional football leagues (e.g., the NFL), and other types of business leagues. They are characterized by a common business interest, which the organization typically promotes. Organizations under this category are exempt from most federal income taxes. "Membership Dues" for a 501(c)(6) are tax deductible as business expenses, however any percentage of these used for political activities (like lobbying) are not tax deductible. The organization must report what percentage of these "dues" are not deductible.

501(c)(6) organizations may engage in limited political activities that inform, educate, and promote their given interest. They may not engage in direct expenditures advocating a vote for a political candidate or cause. Donations to 501(c)(6) organizations are not required to be disclosed.

[edit] 501(c)(7)

A section 501(c)(7) organization is permitted to receive up to 35% of its gross receipts, including investment income, from outside of its membership without losing its tax-exempt status. However, only 15% of the organization's gross receipts may be derived from use of the organization's facilities by the general public.

The existence of private inurement can operate to deprive a social club of its exempt status. The general test is whether the club generates revenue from non-members, the use of which overflows to the personal advantage of the members (such as reduced dues, improved facilities, and the like).

[edit] 501(c)(10)

501(c)(10) establishes exemption from federal income taxes for groups, associations or organizations that operate as a fraternal organization. These groups usually operate as "lodges" or sub-chapters under the control and/or supervision of a parent.

The tax-exempt function is related to the cause that these groups raise funds for; for example, the Ancient Arabic Order of the Nobles of the Mystic Shrine (Shriners) support Shriners Hospitals for Children. While they are a tax-exempt organization, the only charitable tax deductible contributions that are allowed must be used exclusively for the support of a recognized 501(c)(3) public charity.

[edit] Notes

  1. ^ 26 U.S.C. § 513(f).
  2. ^ E.g., 26 U.S.C. § 6033 and 26 U.S.C. § 6050L.
  3. ^ Internal Revenue Bulletin 23, 1982, exercising 26 U.S.C. § 6033(a)(2)(B).
  4. ^ http://www.irs.gov/charities/article/0,,id=169250,00.html.
  5. ^ 26 U.S.C. § 6652 and 26 U.S.C. § 6104.
  6. ^ Political and Lobbying Activities
  7. ^ See 26 U.S.C. § 501(c)(4)(A).
  8. ^ See 26 U.S.C. § 501(c)(4)(B).

[edit] See also

[edit] External links