Can I Get Tax Exempt Status for My Nonprofit Corporation?

Organizations may obtain tax exempt status if they meet the criteria for a tax exempt organization under the Internal Revenue Code. Section 501(c)(3) of the Internal Revenue Code details the types of organizations that may qualify for tax exempt status.  This is why you often hear tax exempt organizations referred to as 501(c)(3) organizations.  In order to tax exempt under Section 501(c)(3), an organization must be organized and operated exclusively for exempt purposes under Section 501(c)(3), and none of the company’s earnings may inure to the benefit of any private individual.  In addition, a tax exempt organization can’t attempt to influence legislation as a substantial part of its activities and can’t participate in any campaign activity for or against political candidates.  Let’s look at each of these requirements individually:

Organizational Test

In order to pass the organizational test under Section 501(c)(3), an organization must be a corporation or unincorporated association, community chest, fund or foundation.  A charitable trust is either a fund or foundation and may qualify, however an individual cannot.  The organizing documents of the entity must limit the entity’s purposes to those set forth in Section 501(c)(3) and must not permit activities that are not in furtherance of those purposes.

Also, the assets of the organization must be permanently dedicated to an exempt purpose.  This means that if the organization ceases to operate, any remaining assets must be distributed for an exempt purpose.  This is accomplished by including a provision in the organizational document stating that the assets will be distributed for an exempt purpose in the event of dissolution.

Operational Test

An organization is operated exclusively for one or more exempt purposes if primarily it only engages in activities that further and accomplish exempt purposes listed in Section 501(c)(3).  If more than an insubstantial part of an organization’s activities do not further an exempt purposes, it will not be regarded as operated exclusively for exempt purposes and thus unqualified to obtain tax exempt status.

Exempt Purposes

The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted definition and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.  Regardless of the exempt purpose(s) an organization may serve, tax exempt organizations are typically referred to as charitable organizations.

When thinking about the exempt purpose(s) your organization will further, consider the class of people the organization will benefit.  This is called the charitable class.  A charitable organization must be set up for the benefit of an indefinite class of individuals, not for specific persons.  As such, an organization set up to benefit Homer Simpson is not a charitable organization, even if you can show that Homer Simpson is impoverished or otherwise deserving of charity.  However, an organization set up for the charitable purpose of assisting impoverished individuals in a particular community is a charitable organization and may select Homer Simpson as a beneficiary.

Private Benefit/Inurement

A tax exempt organization may not be organized or operated to benefit private interests.  This includes the company’s officers and directors, their families, shareholders of the organization (if any), or other people being controlled directly or indirectly by such persons.  No part of the net earnings of a tax exempt organization may inure to the benefit of any individual or private shareholder that has a personal and private interest in the activities of the organization.

Lobbying & Political Activities

Engaging in political or lobbying activities is a very slippery slope for 501(c)(3) organizations.  Different rules apply to political activities (campaign contributions or activities for or against a candidate) and lobbying (attempting to influence legislation) and have different consequences if the rules are violated.  These consequences could mean denial or revocation of an organization’s 501(c)(3) status and taxes being imposed on the organization.  Whether an organization is violating these rules depends on 1) the type of organization (there are different rules for private foundations than other 501(c)(3) organizations); 2) the type of activity at issue (political or lobbying); and 3) the scope or amount of the activity conducted.

If you think your organization qualifies for tax exempt status, the next step is to complete and file an IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.