Who Is Eligible for Section 501(c)(3)
Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals are eligible to file Form 1023 to obtain recognition of exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code.
Form 1023 not necessary. The following types of organizations may be considered tax exempt under section 501(c)(3) even if they do not file Form 1023.
- Churches, including synagogues, temples, and mosques.
- Integrated auxiliaries of churches and conventions or associations of churches.
- Any organization that has gross receipts in each taxable year of normally not more than $5,000.
Even though the above organizations are not required to file Form 1023 to be tax exempt, these organizations may choose to file Form 1023 in order to receive a determination letter that recognizes their section 501(c)(3) status and specifies whether contributions to them are tax deductible.
Qualification of a Section 501(c)(3) Organization
There are two key requirements for an organization to be exempt from federal income tax under section 501(c)(3). A 501(c)(3) organization must be organized and operated exclusively for one or more exempt purposes.
Organized. An organization must be organized as a corporation (including a limited liability company), trust, or unincorporated association. The organizing document (articles of incorporation if you are a corporation, articles of organization if you are a limited liability company, articles of association or constitution if you are an association, or trust agreement or declaration of trust if you are a trust) must limit the organization’s purpose(s) and permanently dedicate its assets to exempt purposes.
Operated. An organization must be operated to further one or more of the exempt purposes stated in its organizing document. Certain other activities are prohibited or restricted, including, but not limited to, the following activities. A 501(c)(3) organization must:
|a. Absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office.|
|b. Absolutely ensure that its assets and earnings do not unjustly enrich board members, officers, key management employees, or other insiders.|
|c. Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially.|
|d. Not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose(s).|
|e. Not engage in activities that are illegal or violate fundamental public policy.|
|f. Restrict its legislative activities.|
Legislative activity. An organization does not qualify for section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation.Form 5768. Most public charities are eligible to elect to make expenditures to influence legislation by filing Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation. By filing Form 5768, an eligible organization’s legislative activities will be measured solely by an expenditure limit rather than by the “no substantial amount” limit. For additional information on the expenditure limit or the no substantial amount limit, see Publication 557, Tax-Exempt Status for Your Organization. For this purpose, “legislation” includes action by Congress, a state legislature, a local council, or a similar governing body, with respect to acts, bills, resolutions or similar items (such as legislative confirmation of appointive offices). Legislation also includes action by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure. Legislation generally does not include actions by executive, judicial, or administrative bodies.
Organizations may involve themselves in issues of public policy without being engaged in legislative activity. For example, organizations may conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues. Similarly, an organization may appear before a governmental body to offer testimony about a decision that may affect the organization’s existence.
Public Charities and Private Foundations
Every organization that qualifies for tax-exempt status under section 501(c)(3) is further classified as either a public charity or a private foundation. For some organizations, the primary distinction between a public charity and a private foundation is an organization’s source of financial support.
A public charity has a broad base of support, while a private foundation receives its support from a small number of donors. This classification is important because different tax rules apply to the operations of each entity.
Deductibility of contributions to a private foundation is more limited than contributions to a public charity. See Publication 526, Charitable Contributions, for more information on the deductibility of contributions. In addition, private foundations are subject to excise taxes that are not imposed on public charities.
Public charities. The following 501(c)(3) organizations are classified as public charities.
- Hospitals, medical research organizations, and cooperative hospital service organizations.
- Organizations that receive substantial support from grants, governmental units, and/or contributions from the general public.
- Organizations that normally receive more than one-third of their support from contributions, membership fees, and gross receipts from activities related to their exempt functions, and not more than one-third of their support from gross investment income and net unrelated business income.
- Organizations that support other public charities.
If an organization requests public charity classification based on receiving substantial public support, it must continue to seek significant and diversified public support contributions in later years. A new organization that cannot show it will receive enough public support may request an advance ruling of its status. After 5 years, it must file Form 8734, Support Schedule for Advance Ruling Period, showing its sources of support during the advance ruling period. If the organization does not meet the public support requirements during the 5-year advance ruling period, it could be reclassified as a private foundation.
Private foundation. A 501(c)(3) organization that cannot meet one of the specific exceptions to be classified as a public charity is a private foundation.
Private operating foundations. A private foundation that lacks general public support but actively conducts exempt programs (as opposed to making grants to other organizations to conduct exempt activities) may be treated as a private operating foundation. Private operating foundations are subject to more favorable rules than other private foundations in terms of charitable contribution deductions and attracting grants from private foundations. In order to be classified as a private operating foundation, an organization must meet certain support tests.
State Registration Requirements
Tax exemption under section 501(c)(3) is a matter of federal law. After receiving federal tax exemption, you may also be required to register with one or more states to solicit for contributions or to obtain exemption from state taxes. The National Association of State Charity Officials (NASCO) maintains a website that provides informational links to the various states for these purposes. It can be accessed at www.nasconet.org.