Creating Non-Profit/Tax-Exempt Organizations Pt. 3 — The 501(c)(3) Basics

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Today we’ll start to go into detail about the most popular — and perhaps most complicated — tax-exempt category, the 501(c)(3). ——————————————– Why do so many non-profit entities attempt to obtain 501(c)(3) status? Aside from the exemption from federal income tax, 501(c)(3)s have several unique benefits that most other categories do not enjoy, including: – Donors to 501(c)(3)s may deduct contributions from their income taxes – Facilitates receipt of public grants – Eligibility for state tax exemptions (income tax, sales tax, property tax) – Eligible for USPS bulk mail rate – Eligibility for tax-exempt bond financing Entities must be organized “exclusively” (read: predominantly) for certain purposes, which are: – Religious – Charitable – Scientific – Educational – Promotion of literary and other arts – Testing for public safety – Fostering of national or international amateur sports competition (unless the organization provides athletic facilities or equipment) – Prevention of cruelty to animals and children 501(c)(3)s also have certain restrictions that other tax-exempt organizations do not have to abide by, including – A prohibition on having any part of earnings inuring to the benefit of a private shareholder or individual – A prohibition on having a substantial part of activities include attempting to influence legislation – A total prohibition on participating or intervening in any political campaign on behalf of a candidate for office In the category of a 501(c)(3), there are two further subcategories: private foundations and public charities. When an organization obtains 501(c)(3) status, it is by default a private foundation, and must prove to the IRS that it meets the criteria for a public charity. Briefly, a public charity is an organization that is funded by many members of the public and/or by the government, whereas a private foundation is typically only funded by a few individuals or organizations.