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Definition of a 501(c)

Thu, 01/24/2008 - 17:56 — TechMission

 

From WikiLaw

 

501(c) is a subsection of the United States Internal Revenue Code (Template:Usc), which lists 28 types of non-profit organizations exempt from certain federal taxes. Sections 503-505 list the requirements for attaining such exemptions. Many states reference Section 501(c) for definitions of organizations exempt from state taxation as well.

Types

The most common 501(c) organizations include:

  • 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)(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)(14) - Credit Unions
  • 501(c)(19) or (23) - U.S. Veterans' posts and auxiliaries

 

General compliance issues

Under IRC Section 511, all 501(c) organizations are subject to tax on their "unrelated business income", whether or not it actually makes a profit, but not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games (Template:Usc). 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. (e.g., Template:Usc, Template:Usc) However, annual returns are not generally required from an exempt organization accruing less than $25,000 in gross income yearly. (Internal Revenue Bulletin 23, 1982, exercising Template:Usc)

Failure to file required returns may result in monetary fines of up to $250,000 per year. Failure to timely file such returns and to make other specific information available to the public is also prohibited. Template:Usc, Template:Usc.

 

501(c)(3)

Section 501(c)(3) is just one of the tax law provisions 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, Template:Usc, 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 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 in IRS terms 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. Contrarily, any organization may instantaneously lose its status for tax-deductible donations if it violates the pertinent regulations.

Organizations with this classification are prohibited from conducting political campaign activities to influence elections to public office. Public charities (but not private foundations) 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. [1]

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.

 

Examples of 501(c)(3) organizations

Many 501(c)(3) organizations are part of nonprofit "conglomerates," having organizational control relationships with other nonprofit organizations. 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 uses its 501(c)(3) arm to provide nonpartisan voter information. A 501(c)(6) business league may create a 501(c)(3) arm to conduct research related to the business focus of the parent organization.

Prominent 501(c)(3) organizations include:

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

 

501(c)(4)

501(c)(4) exemptions are given to civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

See Template:Usc.

The exemption does not apply "unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual." See Template:Usc.

 

Deductibility of donations to 501(c)(4) organizations

Unlike donations to the more prevalent 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 a volunteer fire department as described in revenue ruling 80-77 or veteran organizations with at least 90% of its membership consisting of war veterans as described in revenue ruling 84-140.

 

Prominent 501(c)(4) organizations

 

501(c)(6)

The 501(c)(6) is specifically reserved to 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. Donations to a 501(c)(6) are not tax deductible as charitable contributions, as is the case in the 501(c)(3) category.

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.

Examples include the National Fluid Power Association, the National Business Aviation Association, Texans for True Mobility, CommerceNet, and the National Association for the Self-Employed.

 

501(c)(10)

501(c)(10) is the Code Section for groups, associations or organizations that operate as a Fraternal Society. These groups usually operate as "lodges" or sub-chapters under the control and/or supervision of a Parent, i.e. the Grand Lodge of .... is the Parent or Controlling organization for a particular state or region for that particular group or organization.

The tax exempt function is related to the cause that these groups will fund raise for .. i.e. the Ancient Arabic Order of the Nobles of the Mystic Shrine known as the Shriners are the fundraisers for the Shriners Hospital 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 IRC 501 (c)(3) public charity, which in the case of the Shriners is the Shriners Hospital for Children (IRC 501 (c)(3)) public charity.

 

See also

 

External links

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