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USC 26 § 501
A 501(c) organization, also known colloquially as a 501(c), is an 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.
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 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 Associations
- 501(c)(9) — Voluntary Employee Beneficiary Associations
- 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) — Cemetery Companies
- 501(c)(14) — State-Chartered Credit Unions, 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 Forces
- 501(c)(20) — Group Legal Services Plan Organizations
- 501(c)(21) — Black lung Benefit Trusts
- 501(c)(22) — Withdrawal Liability Payment Fund
- 501(c)(23) — Veterans Organization (created before 1880)
- 501(c)(24) — Section 4049 ERISA Trusts
- 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 Reinsurance Organization
- 501(c)(28) — National Railroad Retirement Investment Trust
- 501(c)(29) — Qualified Nonprofit Health Insurance Issuers (Created in section 1322(h)(1) of the Affordable Care Act)
† 501(c)(20) and 501(c)(24) organization types receive little mention in IRS Publication 557 and are not included in its Organization Reference Chart. 501(c)(20) organizations are no longer tax-exempt under Section 501(c)(20) after June 30, 1992, but they may request to become exempt under Section 501(c)(9) effective July 1, 1992. 501(c)(24) organizations are described as Section 4049 ERISA Trusts; Section 4049 of ERISA has been repealed.
Certain day care centers may qualify as tax-exempt under Section 501(k). The day care center must provide child care away from their homes. At least 85 percent of the children served must be cared for while their parent or guardian is either employed, seeking employment, or a full-time student. Most of the day care center's funding must come from fees received for day care services. The day care center must also provide child care services to the general public. The tax exemption for certain day care centers was part of the Deficit Reduction Act of 1984.
General compliance issues
Under Section 511, a 501(c) organization is subject to tax on its "unrelated business income", 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.
Tax exemption does not excuse an organization from maintaining proper records and filing any required annual or special-purpose IRS
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 are 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.
501(c)(3) exemptions apply to corporations, and any community chest, fund, cooperating association or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals. There are also supporting organizations which are often referred to in shorthand form as "Friends of" organizations.
Another provision, § 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 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 disbursed 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.
Churches must meet specific requirements in order to obtain and maintain tax exempt status; these are outlined in IRS Publication 1828: Tax guide for churches and religious organizations. This guide 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.
Before donating to a 501(c)(3) organization, a donor may wish to consult the searchable online IRS list of charitable organizations as well as lists which may be maintained by a state on a portion of its web portal devoted to its "department of justice" or "office of attorney general".
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 basic requirement of getting tax exempt status is that the organization is specifically limited in powers to purposes that the IRS classifies as tax exempt purposes. Unlike for-profit corporations that benefit from broad and general purposes, non profit organizations need to be limited in powers to function with tax exempt status, but a non profit corporation is by default not limited in powers until it specifically limits itself in the articles of incorporation and/or nonprofit corporate bylaws. This limiting of the powers is crucial to obtaining tax exempt status with the IRS and then on the state level. 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, but as of late 2011 the release date is unclear.
There is an alternative way for an organization to obtain status if an organization has applied for a determination and either there is an actual controversy regarding a determination or the Internal Revenue Service has failed to make a determination. In these cases, the United States Tax Court, the United States District Court for the District of Columbia, and the United States Court of Federal Claims have concurrent jurisdiction to issue a declaratory judgment of the organization's qualification if the organization has exhausted administrative remedies with the Internal Revenue Service.
Section 501(c)(3) organizations are prohibited from supporting political candidates, and are subject to limits on lobbying. They risk loss of tax exempt status if these rules are violated. An organization that loses its 501(c)(3) status due to being engaged in political activities cannot then qualify for 501(c)(4) status.
Organizations described in section 501(c)(3) are prohibited from conducting political campaign activities to intervene in elections to public office. 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.
In contrast to the 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 lobbying, 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) organizations are generally civic leagues and other corporations operated exclusively for the promotion of "social welfare", such as civics and civics issues, 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. An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community.
501(c)(4) organizations may inform the public on controversial subjects and attempt to influence legislation relevant to its program and, unlike 501(c)(3) organizations, they may also participate in political campaigns and elections, as long as its primary activity is the promotion of social welfare. 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. An "action" organization generally qualifies as a 501(c)(4) organization. An "action" organization is one whose activities substantially include, or are exclusively, direct lobbying or grass roots lobbying related to advocacy for or against legislation or proposing, supporting, or opposing legislation that is related to its purpose. A 501(c)(4) organization may directly or indirectly support or oppose a candidate for public office as long as such activities are not a substantial amount of its activities.
Contributions to 501(c)(4) organizations are usually not deductible as charitable contributions for U.S. federal income tax, with a few exceptions. Dues or contributions to 501(c)(4) organizations may be deductible as a business expense under IRC 162, although amounts paid for intervention or participation in any political campaign, direct lobbying, grass roots lobbying, and contact with certain federal officials are not deductible. If a 501(c)(4) engages in a substantial amount of these activities, then only the amount of dues or contributions that can be attributed to other activities may be deductible as a business expense. The organization should provide a notice to its members containing a reasonable estimate of the amount related to lobbying and political campaign expenditures, or else the organization is subject to a proxy tax on its lobbying and political campaign expenditures. The organization should also provide an express statement that contributions to the organization are not deductible as charitable contributions during fundraising solicitations.
501(c)(4) organizations are not required to disclose their donors publicly. The lack of disclosure has led to extensive use of the 501(c)(4) provisions for organizations that are actively involved in lobbying, and has become controversial. Criticized as "dark money", spending from these organizations on political TV ads has exceeded spending from Super PACs.
The origins of 501(c)(4) organizations date back to the Revenue Act of 1913, which created a new group of tax-exempt organizations dedicated to social welfare in a precursor to what is now Internal Revenue Code Section 501(c)(4).
501(c)(5) organizations include labor, agricultural and horticultural organizations. Labor unions, county fairs and flower societies are examples of these types of groups. They share a requirement that benefits may not inure to a specific member but the rules for inurement vary among the three different types of organizations under this segment.
501(c)(6) organizations include Business Leagues, Home Builders Association, the Security Industry Association, Chambers of Commerce, Real Estate Boards, etc. such as the U.S. Chamber of Commerce, the Edison Electric Institute, and the National Football League.
- 527 organization
- GuideStar offers information on more than 50,000 501(c)(3) public charities and private foundations.
- Political action committee
- Publication 557 governs 501(c) organizations.