Section 501c3 is a portion of the United States Internal Revenue Service (IRS) Code that enables qualifying nonprofit organizations to obtain certain federal benefits and tax exemptions. It is the federal government’s highly regulated version of a pat on the back in exchange for organizing and operating an agency for a charitable cause.
501c3 organizations can be corporations, LLCs (in extremely limited cases), or trusts, but because of the required charitable component, the overwhelming majority are nonprofit organizations.
What is a 501c3 Organization?
The U.S. government defines a 501c3 organization as an entity that offers relief or services to the needy or distressed without unfair private gains. This is a strict policy. Public charities are organizations with active programs that aim to improve society with education, community-building, and human rights defense. Therefore, churches, academic societies, public safety groups, amateur sport clubs, and charitable organizations are the most common 501c3s.
Each qualifying entity must file a Form 1023 (or Form 1023-EZ) Application for Recognition of Tax Exemption with the IRS. This form will delve deep into the organization’s structure, leadership, and programming to determine if its walk matches its virtuous talk.
What rules must 501c3 organizations follow?
In order to uphold 501c3 status, a public charity must generate a minimum of one third of its revenue from a broad base of public support while wearing a jacket of political impartiality. A 501c3 cannot actively support (or not support) legislation through lobbying or propaganda with more than 10-20 percent of the organization’s resources or activities. Nonprofits that actively lobby should file Form 1023 in place of 1023-EZ.
In the instance a 501c3 organization compensates a substantial contributor, the organization is liable to be fined for an “excess benefit transaction” up to the entire amount of the original compensation. Beyond staying accountable to its donors and program beneficiaries, a 501c3 must remain accountable to the IRS by filing a 990 Form each year. Each state has specific accountability forms, as well.
What are the perks of being a 501c3?
Once the government approves an organization’s 501c3 membership, it opens the door to a wide array of benefits for the organization itself and its financial supporters.
One of the most unique features of a 501c3 is its ability to offer its donors tax deductions for their donations. Individual donors can claim up to 50 percent of their annual income in deductions, while corporate donors can claim up to 10 percent.
501c3 organizations are also exempt from paying federal corporate income taxes, have the ability to apply for grants and funding specific to 501c3 groups, have the opportunity for possible exemption from state corporate income and sale taxes, and can receive discount bulk-mail rates from the U.S. Postal Service.
