501(c)

The term “501(c)” refers to a subsection of the United States Internal Revenue Code (IRC). Organizations that meet specific requirements described in section 501(c) of the IRC can obtain tax-exempt status and avoid paying federal income tax. Section 501(c) encompasses a variety of nonprofit organizations, each with different purposes and requirements for eligibility. This section of the code plays a crucial role in the legal and operational framework of nonprofit organizations in the U.S.

Types of 501(c) Organizations

The IRS lists 29 types of organizations that can qualify for exemption from federal income tax under section 501(c). The most common types include:

501(c)(3)

501(c)(3) organizations are the most well-known type of tax-exempt nonprofit. They can be religious, educational, charitable, scientific, or literary organizations, as well as organizations dedicated to public safety testing, fostering national or international amateur sports competitions, or preventing cruelty to children or animals. Donations to 501(c)(3) organizations are tax-deductible for donors. Examples include:

• Churches and religious organizations
• Educational institutions, such as schools and universities
• Charitable organizations, like food banks and homeless shelters
• Scientific research organizations

For more information, see the IRS page on 501(c)(3) organizations: IRS 501(c)(3) Information

501(c)(4)

501(c)(4) organizations are social welfare organizations. They can engage in activities that promote the common good and general welfare of the community. Unlike 501(c)(3) organizations, contributions to 501(c)(4) organizations are not tax-deductible, and these organizations can engage in political lobbying and advocacy as long as it is not their primary activity.

501(c)(6)

501(c)(6) includes business leagues, chambers of commerce, real estate boards, and boards of trade. These organizations promote the common business interests of their members. They are often involved in advocacy and lobbying efforts on behalf of their members.

501(c)(7)

501(c)(7) organizations are social and recreational clubs operated for pleasure, recreation, and other nonprofitable purposes. Membership organizations such as country clubs and fraternal lodges fall under this category.

501(c)(19)

501(c)(19) pertains to veterans’ organizations. These groups are created for past and present members of the Armed Forces and their families. An example is the Veterans of Foreign Wars (VFW).

Establishing a 501(c) Organization

Forming a 501(c) organization involves several key steps:

1. Incorporation: Form a nonprofit corporation under state law. This typically involves filing articles of incorporation and drafting bylaws.
2. Obtain an Employer Identification Number (EIN): Apply for an EIN from the IRS.
3. Apply for Tax-Exempt Status: Submit Form 1023 (for 501(c)(3) status) or Form 1024 (for other types) to the IRS. This application details the organization’s structure, governance, and exempt purpose.
4. State Filings: Complete any required state registrations, which may include obtaining state tax exemptions, registering as a charity, and securing any necessary permits or licenses.

Compliance and Reporting

501(c) organizations must adhere to certain compliance requirements to maintain their tax-exempt status:

• Annual Filings: Most 501(c) organizations must file an annual return with the IRS (Form 990, 990-EZ, or 990-N). This filing includes information about the organization’s activities, finances, and governance.
• Public Disclosure: 501(c) organizations are required to make certain documents, such as their application for tax-exempt status and annual returns, available for public inspection.
• Unrelated Business Income: Income generated from activities unrelated to the organization’s exempt purpose may be subject to income tax and must be reported on Form 990-T.
• Lobbying and Political Activity: Restrictions vary depending on the type of 501(c) organization, but most have limitations on lobbying and political campaigning to varying degrees.

Benefits of 501(c) Status

The primary benefit of 501(c) status is federal income tax exemption. However, there are other advantages:

• State and Local Tax Exemptions: Many states and local jurisdictions offer tax exemptions and benefits to 501(c) organizations.
• Deductible Contributions: Donors to 501(c)(3) organizations can deduct their contributions from their taxable income.
• Grant Eligibility: Many foundations and government entities require organizations to have tax-exempt status under 501(c) to be eligible for grants.
• Postal Discounts: 501(c) organizations may be eligible for reduced postal rates for bulk mailings.

Challenges and Considerations

While obtaining 501(c) status offers several benefits, it also presents some challenges:

• Administrative Burden: The application process can be lengthy and complex, requiring detailed documentation and compliance with IRS regulations.
• Regulatory Scrutiny: 501(c) organizations are subject to ongoing oversight by the IRS and state authorities, which can involve audits and investigations.
• Public Accountability: The requirement to disclose certain documents and financial information can increase transparency but may also expose the organization to public scrutiny.
• Restricted Activities: Compliance with rules regarding political and lobbying activities can limit the scope of the organization’s advocacy efforts.

Conclusion

Section 501(c) of the Internal Revenue Code is a foundational element of the nonprofit sector in the United States. It provides the framework for a wide variety of organizations to operate on a tax-exempt basis while contributing to the public good. Understanding the different types of 501(c) organizations, the process of obtaining tax-exempt status, compliance requirements, and the associated benefits and challenges is essential for anyone involved in or considering the establishment of such an organization.