501(c)
Encyclopedia
Colloquially, a 501 organization or simply "a 501(c)" is an American
tax-exempt, nonprofit corporation or association. Section 501(c) of the United States Internal Revenue Code
, provides that 28 types of nonprofit organization
s are exempt
from some federal
income taxes
. Sections 503 through 505 set out the requirements for attaining such exemptions. Many states refer to Section 501(c) for definitions of organizations exempt from state taxation as well.
," whether or not the organization actually makes a profit, but not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games. 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 return
s. Previously, annual returns were not generally required from an exempt organization accruing less than $25,000 in gross income yearly. However, from 2008 onwards, many such organizations must file a yearly "e-Postcard" known as Form 990-N, or risk losing their exemption.
Failure to file required returns such as Form 990 (Return of Organization Exempt From Income Tax) may result in monetary fines of up to $250,000 per year. Exempt or political organizations (excluding churches or similar religious entities) must make their returns, reports, notices, and exempt applications available for public inspection. The organization's Form 990 (or similar such public record as the Form 990-EZ or Form 990-PF) is generally available for public inspection and photocopying at the offices of the exempt organization, through a written request and payment for photocopies by mail from the exempt organization, or through a direct Form 4506-A Request for Public Inspection or Copy or Political Organization IRS Form request to the IRS of the exempt organization filing of Form 990 for the past three tax years. The Form 4506-A also allows the public inspection and/or photocopying access to Form 1023 Application for Recognition of Exemption or Form 1024, Form 8871 Political Organization Notice of Section 527 Status, and Form 8872 Political Organization Report of Contribution and Expenditures. Internet access to an organization's 990 and some other forms is available through information services such as GuideStar
.
Failure to file such timely returns and to make other specific information available to the public also is prohibited.
or foundation, organized and operated exclusively for religious
, charitable
, scientific
, testing for public safety, literary
, or education
al purposes, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals.. These bodies are often referred to in shorthand form as "Friends of" organizations.
Another provision, , provides a deduction, for federal income tax purposes, for some donors who make charitable contribution
s 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 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.
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, but contributions to 509(a)(4) organizations are not deductible by the donor for federal income, estate, or gift tax purposes.
The two exempt classifications of 501(c)(3) organizations are as follows:
A public charity, identified by the 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 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 dispersed 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.
Before donating to a 501(c)(3) organization, a donor may wish to review IRS Publication 78, which lists organizations currently exempt under 501(c)(3).
Donors may also verify 501(c)(3) organizations on the web-based, searchable IRS list of charitable organizations as well as on lists maintained by the states, typically on states' Departments of Justice websites. Churches, however, have specific requirements to obtain and maintain tax exempt status; these are outlined in IRS Publication 1828: Tax guide for churches and religious organizations. This guide clearly outlines activities allowed and not allowed by churches under the 501(c)(3) designation. A private, nonprofit organization, GuideStar, also provides reputable and detailed results for web-based searching to verify information on 501(c)(3) organizations..
Consumers may file IRS Form 13909 with documentation to complain about inappropriate or fradulent (i.e., fundraising, political campaigning, lobbying) activities by any 501(c)(3) tax-exempt organization..
The IRS also expects to release a software tool called Cyber Assistant, which will assist with preparation of the application for tax exemption.
activities to intervene in election
s to public office. The Internal Revenue Service website elaborates upon this prohibition as follows:
, 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.
To clarify the standard of the "substantial part" test, 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.
Contributions to 501(c)(4) organizations are not deductible as charitable contributions for the U.S. income tax. 501(c)(4) organizations are not required to disclose their donors publicly. This aspect of the law has led to extensive use of the 501(c)(4) provisions for organizations that are actively involved in lobbying, and has become controversial. In 2010, a bill (the DISCLOSE Act
) was passed by the U.S. House of Representatives that addressed identification of donors to organizations involved in political advocacy, but the bill failed to pass in the Senate.
In summer 2011, comedian Stephen Colbert
brought attention to the issue of Super PACs by forming his own
and a 501(c)(4). As of August 2011, 165,000 of his viewers had joined it.
.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
tax-exempt, nonprofit corporation or association. Section 501(c) of the United States Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
, provides that 28 types of nonprofit organization
Nonprofit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
s are exempt
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
from some federal
Taxation in the United States
The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
income taxes
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
. Sections 503 through 505 set out the requirements for attaining such exemptions. Many states refer to Section 501(c) for definitions of organizations exempt from state taxation as well.
Types
According to the IRS Publication 557, in the Organization Reference Chart section, the following is an exact list of 501(c) organization types and their corresponding descriptions.- 501(c)(1) — Corporations Organized Under Act of Congress (including Federal Credit UnionsFederal Credit Union ActThe Federal Credit Union Act is an Act of Congress enacted in 1934. The purpose of the law was to make credit available and promote thrift through a national system of nonprofit, cooperative credit unions...
) - 501(c)(2) — Title Holding Corporation for Exempt Organization
- 501(c)(3) — Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations
- 501(c)(4) — Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
- 501(c)(5) — Labor, Agricultural, and Horticultural Organizations
- 501(c)(6) — Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
- 501(c)(7) — Social and Recreational Clubs
- 501(c)(8) — Fraternal Beneficiary Societies and AssociationsBenefit societyA benefit society or mutual aid society is an organization or voluntary association formed to provide mutual aid, benefit or insurance for relief from sundry difficulties...
- 501(c)(9) — Voluntary Employee Beneficiary AssociationVoluntary Employee Beneficiary AssociationA voluntary employees' beneficiary association is a form of trust fund permitted under American tax law whose sole purpose must be to provide employee benefits...
s - 501(c)(10) — Domestic Fraternal Societies and Associations
- 501(c)(11) — Teachers' Retirement Fund Associations
- 501(c)(12) — Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, etc.
- 501(c)(13) — CemeteryCemeteryA cemetery is a place in which dead bodies and cremated remains are buried. The term "cemetery" implies that the land is specifically designated as a burying ground. Cemeteries in the Western world are where the final ceremonies of death are observed...
Companies - 501(c)(14) — State-Chartered Credit UnionCredit unionA credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
s, Mutual Reserve Funds - 501(c)(15) — Mutual Insurance Companies or Associations
- 501(c)(16) — Cooperative Organizations to Finance Crop Operations
- 501(c)(17) — Supplemental Unemployment Benefit Trusts
- 501(c)(18) — Employee Funded Pension Trust (created before June 25, 1959)
- 501(c)(19) — Post or Organization of Past or Present Members of the Armed ForcesUnited States armed forcesThe United States Armed Forces are the military forces of the United States. They consist of the Army, Navy, Marine Corps, Air Force, and Coast Guard.The United States has a strong tradition of civilian control of the military...
- 501(c)(21) — Black lungCoalworker's pneumoconiosisCoal workers' pneumoconiosis , colloquially referred to as black lung disease, is caused by long exposure to coal dust. It is a common affliction of coal miners and others who work with coal, similar to both silicosis from inhaling silica dust, and to the long-term effects of tobacco smoking...
Benefit Trusts - 501(c)(22) — Withdrawal Liability Payment Fund
- 501(c)(23) — Veterans Organization (created before 1880)
- 501(c)(25) — Title Holding Corporations or Trusts with Multiple Parents
- 501(c)(26) — State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
- 501(c)(27) — State-Sponsored Workers' Compensation ReinsuranceReinsuranceReinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...
Organization - 501(c)(28) — National Railroad Retirement Investment Trust
General compliance issues
Under Section 511, a 501(c) organization is subject to tax on its "unrelated business incomeUnrelated Business Income Tax
Unrelated Business Income Tax in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 USCA 501 organization that is not related to the tax-exempt purpose of that organization....
," whether or not the organization actually makes a profit, but not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games. 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 return
Tax return
A tax return is a tax form that can be filed with a government body to declare liability for taxation in various countries:* Tax return * Tax return * Tax return * Tax return...
s. Previously, annual returns were not generally required from an exempt organization accruing less than $25,000 in gross income yearly. However, from 2008 onwards, many such organizations must file a yearly "e-Postcard" known as Form 990-N, or risk losing their exemption.
Failure to file required returns such as Form 990 (Return of Organization Exempt From Income Tax) may result in monetary fines of up to $250,000 per year. Exempt or political organizations (excluding churches or similar religious entities) must make their returns, reports, notices, and exempt applications available for public inspection. The organization's Form 990 (or similar such public record as the Form 990-EZ or Form 990-PF) is generally available for public inspection and photocopying at the offices of the exempt organization, through a written request and payment for photocopies by mail from the exempt organization, or through a direct Form 4506-A Request for Public Inspection or Copy or Political Organization IRS Form request to the IRS of the exempt organization filing of Form 990 for the past three tax years. The Form 4506-A also allows the public inspection and/or photocopying access to Form 1023 Application for Recognition of Exemption or Form 1024, Form 8871 Political Organization Notice of Section 527 Status, and Form 8872 Political Organization Report of Contribution and Expenditures. Internet access to an organization's 990 and some other forms is available through information services such as GuideStar
GuideStar
GuideStar USA, Inc. is an information service specializing in reporting on U.S. nonprofit companies. In 2010, their database contained over 5 million IRS Forms 990 filings on 1.9 million organizations.....
.
Failure to file such timely returns and to make other specific information available to the public also is prohibited.
501(c)(3)
501(c)(3) exemptions apply to corporations, and any community chest, fund, cooperating associationCooperating Associations
Cooperating Associations, also known as interpretive associations or natural history associations, support the interpretive, educational and scientific programs and services of governmental land management agencies such as the National Park Service, USDA Forest Service, US Fish and Wildlife...
or foundation, organized and operated exclusively for religious
Religion
Religion is a collection of cultural systems, belief systems, and worldviews that establishes symbols that relate humanity to spirituality and, sometimes, to moral values. Many religions have narratives, symbols, traditions and sacred histories that are intended to give meaning to life or to...
, charitable
Charitable organization
A charitable organization is a type of non-profit organization . It differs from other types of NPOs in that it centers on philanthropic goals A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals A...
, scientific
Science
Science is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe...
, testing for public safety, literary
Literature
Literature is the art of written works, and is not bound to published sources...
, or education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
al purposes, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals.. These bodies are often referred to in shorthand form as "Friends of" organizations.
Another provision, , provides a deduction, for federal income tax purposes, for some donors who make charitable contribution
Charitable contribution
Charitable contribution deductions for United States Federal Income Tax purposes are defined in section 170 of the Internal Revenue Code as contributions to or for the use of certain nonprofit enterprises. See...
s 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 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.
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, but contributions to 509(a)(4) organizations are not deductible by the donor for federal income, estate, or gift tax purposes.
The two exempt classifications of 501(c)(3) organizations are as follows:
A public charity, identified by the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(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 under sections 509(a)(1) through 509(a)(4).
A private foundation
Private foundation
A private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets...
, 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 dispersed 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.
Before donating to a 501(c)(3) organization, a donor may wish to review IRS Publication 78, which lists organizations currently exempt under 501(c)(3).
Donors may also verify 501(c)(3) organizations on the web-based, searchable IRS list of charitable organizations as well as on lists maintained by the states, typically on states' Departments of Justice websites. Churches, however, have specific requirements to obtain and maintain tax exempt status; these are outlined in IRS Publication 1828: Tax guide for churches and religious organizations. This guide clearly outlines activities allowed and not allowed by churches under the 501(c)(3) designation. A private, nonprofit organization, GuideStar, also provides reputable and detailed results for web-based searching to verify information on 501(c)(3) organizations..
Consumers may file IRS Form 13909 with documentation to complain about inappropriate or fradulent (i.e., fundraising, political campaigning, lobbying) activities by any 501(c)(3) tax-exempt organization..
Obtaining status
Most organizations acquire 501(c)(3) tax exemption by filing IRS Form 1023. 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. If yearly gross receipts are expected to average less than $10,000, the filing fee is reduced to $400. 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
- Organizations that are not private foundations and that have gross receipts that normally are not more than $5,000
The IRS also expects to release a software tool called Cyber Assistant, which will assist with preparation of the application for tax exemption.
Political activity
Section 501(c)(3) organizations are subject to limits or absolute prohibitions on engaging in political activities.Elections
Organizations described in section 501(c)(3) are prohibited from conducting political campaignPolitical campaign
A political campaign is an organized effort which seeks to influence the decision making process within a specific group. In democracies, political campaigns often refer to electoral campaigns, wherein representatives are chosen or referendums are decided...
activities to intervene in election
Election
An election is a formal decision-making process by which a population chooses an individual to hold public office. Elections have been the usual mechanism by which modern representative democracy operates since the 17th century. Elections may fill offices in the legislature, sometimes in the...
s to public office. The Internal Revenue Service website elaborates upon this prohibition as follows:
Lobbying
In contrast to the absolute 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 lobbyingLobbying
Lobbying is the act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory agencies. Lobbying is done by various people or groups, from private-sector individuals or corporations, fellow legislators or government officials, or...
, 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.
To clarify the standard of the "substantial part" test, 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.
501(c)(4)
501(c)(4) organizations are generally civic leagues and other corporations operated exclusively for the promotion of social welfare, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood, and with net earnings devoted exclusively to charitable, educational, or recreational purposes. 501(c)(4) organizations may lobby for legislation, and unlike 501(c)(3) organizations they may also participate in political campaigns and elections, as long as campaigning is not the organization's primary purpose. The tax exemption for 501(c)(4) organizations applies to most of their operations, but contributions may be subject to gift tax, and income spent on political activities - generally the advocacy of a particular candidate in an election - is taxable.Contributions to 501(c)(4) organizations are not deductible as charitable contributions for the U.S. income tax. 501(c)(4) organizations are not required to disclose their donors publicly. This aspect of the law has led to extensive use of the 501(c)(4) provisions for organizations that are actively involved in lobbying, and has become controversial. In 2010, a bill (the DISCLOSE Act
DISCLOSE Act
The Democracy Is Strengthened by Casting Light On Spending in Elections Act, commonly known as the DISCLOSE Act and also known as H.R. 5175 , was a bill introduced in the U.S. House of Representatives by Chris Van Hollen on April 29, 2010 and in the U.S...
) was passed by the U.S. House of Representatives that addressed identification of donors to organizations involved in political advocacy, but the bill failed to pass in the Senate.
In summer 2011, comedian Stephen Colbert
Stephen Colbert
Stephen Tyrone Colbert is an American political satirist, writer, comedian, television host, and actor. He is the host of Comedy Central's The Colbert Report, a satirical news show in which Colbert portrays a caricatured version of conservative political pundits.Colbert originally studied to be an...
brought attention to the issue of Super PACs by forming his own
Colbert Super PAC
Americans for a Better Tomorrow, Tomorrow is a United States political action committee established by Stephen Colbert, who portrays a conservative political pundit on the television series The Colbert Report...
and a 501(c)(4). As of August 2011, 165,000 of his viewers had joined it.
501(c)(6)
501(c)(6) organizations include Business Leagues, Home Builders Association, Chambers of Commerce, Real Estate Boards, etc. such as the U.S. Chamber of Commerce political action committee and the National Football LeagueNational Football League
The National Football League is the highest level of professional American football in the United States, and is considered the top professional American football league in the world. It was formed by eleven teams in 1920 as the American Professional Football Association, with the league changing...
.
See also
- 527 organization
- GuideStarGuideStarGuideStar USA, Inc. is an information service specializing in reporting on U.S. nonprofit companies. In 2010, their database contained over 5 million IRS Forms 990 filings on 1.9 million organizations.....
offers information on more than 50,000 501(c)(3) public charities and private foundations. - Political action committeePolitical action committeeIn the United States, a political action committee, or PAC, is the name commonly given to a private group, regardless of size, organized to elect political candidates or to advance the outcome of a political issue or legislation. Legally, what constitutes a "PAC" for purposes of regulation is a...