A
501(c)(3) organization is a corporation, trust, unincorporated
association, or other type of organization that is exempt from federal
income tax under section 501(c)(3) of Title 26 of the United States
Code. It is the most common type of the 29 types of 501(c) nonprofit
organizations in the United States. Many charitable non-profits in the
United States that Americans commonly know of, and often make
donations to, are 501(c)(3) organizations,[according to whom?] ranging
from charitable foundations to universities and churches. These
organizations must be approved by the
Internal Revenue Service
Internal Revenue Service to be
tax-exempt under the terms of section 501(c)(3) of the Internal
Revenue Code.
501(c)(3) tax-exemptions apply to entities that are organized and
operated exclusively for religious, charitable, scientific, literary,
or educational purposes, or for testing for public safety, or to
foster national or international amateur sports competition, or for
the prevention of cruelty to children, women, or animals. 501(c)(3)
exemption applies also for any non-incorporated community chest, fund,
cooperating association or foundation that is organized and operated
exclusively for those purposes.[1][2] There are also supporting
organizations—often referred to in shorthand form as "Friends of"
organizations.[3][4][5][6][7]
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 to be allowed (e.g.,
receipts for donations over $250).
Due to the tax deductions associated with donations, loss of 501(c)(3)
status can be highly challenging if not fatal to a charity's continued
operation, as many foundations and corporate matching programs do not
grant funds to a charity without such status, and individual donors
often do not donate to such a charity due to the unavailability of the
deduction.
Contents
1 Types
2 Obtaining status
3 Tax-deductible charitable contributions
4 Limitations on political activity
4.1 Constitutionality
4.2
Political campaign
Political campaign activities
4.3 Lobbying
5 Foreign activities
5.1 Allowance of tax-deduction by donors
5.2 Foreign subsidiaries
6 References
Types[edit]
The two exempt classifications of 501(c)(3) organizations are as
follows:[8]
A public charity, identified by the
Internal Revenue Service
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
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
Internal Revenue Code under section
509(a) as 501(c)(3) organizations, which do not qualify as public
charities.
Churches must meet specific requirements in order to obtain and
maintain tax exempt status; these are outlined in IRS Publication
1828: Tax guide for churches and religious organizations.[9] This
guide outlines activities allowed and not allowed by churches under
the 501(c)(3) designation. A private, nonprofit organization,
GuideStar, also provides information on 501(c)(3) organizations.[10]
Obtaining status[edit]
The basic requirement of obtaining tax-exempt status is that the
organization is specifically limited in powers to purposes that the
IRS classifies as tax-exempt purposes. Unlike for-profit corporations
that benefit from broad and general purposes, non-profit organizations
need to be limited in powers to function with tax-exempt status, but a
non-profit corporation is by default not limited in powers until it
specifically limits itself in the articles of incorporation or
nonprofit corporate bylaws. This limiting of the powers is crucial to
obtaining tax exempt status with the IRS and then on the state
level.[11] Organizations acquire 501(c)(3) tax exemption by filing IRS
Form 1023.[12] As of 2006[update] the form must be accompanied by a
$850 filing fee if the yearly gross receipts for the organization are
expected to average $10,000 or more.[13][14] If yearly gross receipts
are expected to average less than $10,000, the filing fee is reduced
to $400.[13][14] There are some classes of organizations that
automatically are treated as tax exempt under 501(c)(3), without the
need to file Form 1023:
Churches, their integrated auxiliaries, and conventions or
associations of churches[15]
Organizations that are not private foundations and that have gross
receipts that normally are not more than $5,000[16]
The IRS also expects to release a software tool called Cyber
Assistant, which assists with preparation of the application for tax
exemption, but as of late 2011 the release date is unclear.[17]
There is an alternative way for an organization to obtain status if an
organization has applied for a determination and either there is an
actual controversy regarding a determination or the Internal Revenue
Service has failed to make a determination. In these cases, the United
States Tax Court, the United States District Court for the District of
Columbia, and the
United States Court of Federal Claims
United States Court of Federal Claims have
concurrent jurisdiction to issue a declaratory judgment of the
organization's qualification if the organization has exhausted
administrative remedies with the Internal Revenue Service.[18][19]
Prior to October 9, 1969, nonprofit organizations could declare
themselves to be tax-exempt under Section 501(c)(3) without first
obtaining
Internal Revenue Service
Internal Revenue Service recognition by filing
Form 1023 and
receiving a determination letter.[20] A nonprofit organization that
did so prior to that date could still be subject to challenge of its
status by the Internal Revenue Service.[20]
Tax-deductible charitable contributions[edit]
An approved 501(c)(3) exemption allows donors to the organization to
reduce their own taxable incomes by deducting the amounts of their
donations given, and thus to reduce their personal income taxes, and
it allows the
501(c)(3) organization to avoid federal income taxes on
the difference between revenues (donations, grants, service fees)
received vs. expenses (wages, supplies, state and local taxes paid,
etc.) in its main operations. In a for-profit business, that
difference would represent taxable income and be taxed at federal
corporate tax rates of 15 to 39 percent.[21] Organizations with
501(c)(3) status may also be exempt from state and local corporate
income taxes, which generally range from 0 to 12 percent.[22]
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,[23] but contributions to 509(a)(4) organizations are not
deductible by the donor for federal income, estate, or gift tax
purposes.[24]
Before donating to a 501(c)(3) organization, a donor may wish to
consult the searchable online IRS list of charitable organizations[25]
as well as lists that may be maintained by a state on a portion of its
web portal devoted to its "department of justice" or "office of
attorney general".
Consumers may file IRS Form 13909 with documentation to complain about
inappropriate or fraudulent (i.e., fundraising, political campaigning,
lobbying) activities by any 501(c)(3) tax-exempt organization.[26]
Think tanks are often incorporated as 501(c)(3) organizations, and
such a level of political influencing is usually considered
acceptable.
501(c)(3) generally must disclose the identities of large donors to
the IRS, but this information is not available for public
disclosure[27] unless the organization is a private foundation.[28]
Religious organizations such as churches are exempt from reporting at
all, as are organizations with annual gross receipts of $50,000 or
less.[29]
Limitations on political activity[edit]
Section 501(c)(3) organizations are prohibited from supporting
political candidates, as a result of the
Johnson Amendment
Johnson Amendment enacted in
1954.[30] Section 501(c)(3) organizations are subject to limits on
lobbying, having a choice between two sets of rules establishing an
upper bound for their lobbying activities. Section 501(c)(3)
organizations risk loss of their tax-exempt status if these rules are
violated.[31][32] An organization that loses its 501(c)(3) status due
to being engaged in political activities cannot subsequently qualify
for 501(c)(4) status.[33]
Constitutionality[edit]
Since section 501(c)(3)'s political-activity prohibition was enacted,
"commentators and litigants have challenged the provision on numerous
constitutional grounds," such as freedom of speech, vagueness, and
equal protection and selective prosecution.[34] Historically, Supreme
Court decisions, such as Regan v. Taxation with Representation of
Washington, suggested that the Court, if it were to squarely examine
the political-activity prohibition of § 501(c)(3), would uphold it
against a constitutional challenge.[34] However, some have suggested
that a successful challenge to the political activities prohibition of
Section 501(c)(3) might be more plausible in light of Citizens United
v. FEC.[35]
Political campaign
Political campaign activities[edit]
Organizations described in section 501(c)(3) are prohibited from
conducting political campaign activities to intervene in elections to
public office.[36] The
Internal Revenue Service
Internal Revenue Service website elaborates on
this prohibition:[36]
Under the Internal Revenue Code, all section 501(c)(3) organizations
are absolutely prohibited from directly or indirectly participating
in, or intervening in, any political campaign on behalf of (or in
opposition to) any candidate for elective public office. Contributions
to political campaign funds or public statements of position (verbal
or written) made on behalf of the organization in favor of or in
opposition to any candidate for public office clearly violate the
prohibition against political campaign activity. Violating this
prohibition may result in denial or revocation of tax-exempt status
and the imposition of certain excise taxes.
Certain activities or expenditures may not be prohibited depending on
the facts and circumstances. For example, certain voter education
activities (including presenting public forums and publishing voter
education guides) conducted in a non-partisan manner do not constitute
prohibited political campaign activity. In addition, other activities
intended to encourage people to participate in the electoral process,
such as voter registration and get-out-the-vote drives, would not be
prohibited political campaign activity if conducted in a non-partisan
manner.
On the other hand, voter education or registration activities with
evidence of bias that (a) would favor one candidate over another; (b)
oppose a candidate in some manner; or (c) have the effect of favoring
a candidate or group of candidates, will constitute prohibited
participation or intervention.
Lobbying[edit]
Main article: 501(h) election
In contrast to the prohibition on political campaign interventions by
all section 501(c)(3) organizations, public charities (but not private
foundations) may conduct a limited amount of lobbying to influence
legislation. Although the law states that "No substantial part..." of
a public charity's activities can go to lobbying, charities with large
budgets may lawfully expend a million dollars (under the "expenditure"
test), or more (under the "substantial part" test) per year on
lobbying.[37]
The
Internal Revenue Service
Internal Revenue Service has never defined the term "substantial
part" with respect to lobbying.[38]
In order to establish a safe harbor for the "substantial part" test,
the
United States Congress
United States Congress enacted §501(h), called the Conable
election after its author, Representative Barber Conable. The section
establishes limits based on operating budget that a charity can use to
determine if it meets the substantial test. This changes the
prohibition against direct intervention in partisan contests only for
lobbying. The organization is now presumed in compliance with the
substantiality test if they work within the limits. The Conable
election requires a charity to file a declaration with the IRS and
file a functional distribution of funds spreadsheet with their Form
990. IRS form 5768 is required to make the Conable election.[39]
Foreign activities[edit]
A
501(c)(3) organization is allowed to conduct some or all of its
charitable activities outside the United States.[40][41] A 501(c)(3)
organization is allowed to award grants to foreign charitable
organizations if the grants are intended for charitable purposes and
the grant funds are subject to the 501(c)(3) organization's
control.[42] Additional procedures are required of 501(c)(3)
organizations that are private foundations.[41][43]
Allowance of tax-deduction by donors[edit]
Donors' contributions to a
501(c)(3) organization are tax-deductible
only if the contribution is for the use of the 501(c)(3) organization,
and that the
501(c)(3) organization is not merely serving as an agent
or conduit of a foreign charitable organization.[42] The 501(c)(3)
organization's management should review the grant application from the
foreign organization, decide whether to award the grant based on the
intended use of the funds, and require continuous oversight based on
the use of funds.[42]
If the donor imposes a restriction or earmark that the contribution
must be used for foreign activities, then the contribution is deemed
to be for the foreign organization rather than the 501(c)(3)
organization, and the contribution is not tax-deductible.[42]
The purpose of the grant to the foreign organization cannot include
endorsing or opposing political candidates for elected office in any
country.[42]
Foreign subsidiaries[edit]
If a
501(c)(3) organization sets up and controls a foreign subsidiary
in order to facilitate its charitable work in a foreign country, then
donors' contributions to the
501(c)(3) organization are tax-deductible
even if they are intended to fund the charitable activities in the
foreign country.[42][44]
If a foreign organization sets up a
501(c)(3) organization for the
sole purpose of raising funds for the foreign organization, and the
501(c)(3) organization sends substantially all contributions to the
foreign organization, then donors' contributions to the 501(c)(3)
organization are not tax-deductible to the donors.[42]
References[edit]
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^ Hopkins, Bruce R. (2011), The Law of Tax-Exempt Organizations (10
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^ Judith S. Ballan, "How To Aid a Foreign Charity Through an 'American
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^ "Legal Dimensions of International Grantmaking: How a Private
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^ "Police: Beware scammers during holiday". The Leader-Herald.
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^ a b IRS "Form 1023" (Rev. 6-2006), p. 12.
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^ 26 U.S.C. § 508(c)(1)(A)
^ 26 U.S.C. § 508(c)(1)(B)
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^ Journy, Matthew T.; Ziffer, Yosef; Tenenbaum, Jeffrey S. (September
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^ "Is a nonprofit required to report anonymous donors to the IRS?".
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^ Chick, Raymond; Henchey, Amy. "Political Organizations and IRC IRC
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^ Berry, Jeffrey M. (November 30, 2003). "The
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