501(c)(3)

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501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, promote the arts, or for the prevention of cruelty to children or animals. [1][2]

Another provision, 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 in order 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 will not grant funds to a charity without such status, and individual donors often will not consider making a donation 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,[3] 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:[4]

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.

Contents

Obtaining status

Most organizations acquire 501(c)(3) tax exemption by filing IRS Form 1023. The form must be accompanied by a $750 filing fee if the gross receipts for the organization are expected to average $10,000 or more.[5] If gross receipts are expected to average less than $10,000, the filing fee is reduced to $300.[6] There are some classes of organizations that are automatically 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[7]
  • Organizations that are not private foundations and that have gross receipts that are normally not more than than $5,000[8]


Beginning January 3, 2010 these fees will be increased. After that date, the filing fee will be "$850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period".[9] "$400 for organizations whose gross receipts are $10,000 or less annually over a 4-year period" [10]

The IRS also expects to release a software tool called Cyber Assistant in 2010, which will assist with the preparation of the application for tax exemption. Once Cyber Assistant becomes available, the user fee structure will change again. The fees will then be $200 for all organizations (regardless of size) that file using Cyber Assistant.[11] Organizations that do not use Cyber Assistant (regardless of size) will pay a user fee of $850.[12]

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 campaign activities to intervene in elections to public office.[13] The Internal Revenue Service website elaborates upon this prohibition as follows:

"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.

"The Internal Revenue Service provides resources to exempt organizations and the public to help them understand the prohibition. As part of its examination program, the IRS also monitors whether organizations are complying with the prohibition."

Lobbying

In contrast to the absolute prohibition on political campaign interventions by all section 501(c)(3) organizations, public charities (but not private foundations) are permitted to conduct a limited amount of lobbying to influence legislation. Although the law states that "no substantial part" of a public charity's activities may be devoted to lobbying, charities with very large budgets may lawfully expend a million dollars (under the "expenditure" test) or more (under the "substantial part" test) per year on lobbying. [14]

References

  1. ^ Exempt Purposes - Internal Revenue Code Section 501(c)(3)
  2. ^ IRS Publication 557 "Tax-Exempt Status For Your Organization", Page 19, (Rev. June 2008), Cat. No 46573C., Retrieved 3/9/2009
  3. ^ IRS, Publication 557 "Tax-Exempt Status For Your Organization", Page 43, (Rev. June 2008), Cat. No 46573C. http://www.irs.gov/pub/irs-pdf/p557.pdf, Retrieved 3/9/2009
  4. ^ IRS, "Life Cycle of a Public Charity/Private Foundation", http://www.irs.gov/charities/charitable/article/0,,id=136459,00.html, Retrieved 3/9/2009
  5. ^ IRS Form 1023 (Rev. 6-2006), p.12
  6. ^ IRS Form 1023 (Rev. 6-2006), p.12
  7. ^ 26 U.S.C. § 508(c)(1)(A)
  8. ^ 26 U.S.C. § 508(c)(1)(B)
  9. ^ IRS Exempt Organizations Website Retrieved on 2009-09-07.
  10. ^ IRS Exempt Organizations Website Retrieved on 2009-09-07.
  11. ^ IRS Exempt Organizations Website Retrieved on 2009-09-02.
  12. ^ IRS Exempt Organizations Website Retrieved on 2009-09-02.
  13. ^ "The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations". Irs.gov. 2009-05-11. http://www.irs.gov/charities/charitable/article/0,,id=163395,00.html. Retrieved on 2009-05-28. 
  14. ^ "Political and Lobbying Activities". Irs.gov. 2009-05-11. http://www.irs.gov/charities/charitable/article/0,,id=120703,00.html. Retrieved on 2009-05-28. 
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