Updated June 30, 2020:

The IRS offers a broad range of nonprofit categories under their 501c federal tax exemption codes, but (3) is the most common. The 501c3 category pertains to what they deem as charitable organizations, many of which are public organizations with a few private foundations. Some of the groups that qualify for this tax code include:

  • Amateur Sports

  • Charitable

  • Educational

  • Literary

  • Prevention of Cruelty (both humans and non-humans)

  • Public Safety

  • Religious

  • Scientific

By meeting the qualifications, a nonprofit institution is allowed to avoid paying federal taxes on their earnings.

501c3 status benefits a nonprofit entity in many ways, but one of the best perks is that their donors can use their contributions as a tax deduction. The majority of other tax codes don’t provide this benefit; so many organizations choose to apply for a 501c3 status because it’s most appealing to donors, whom they rely on to fund their activities.

The Basic 501c3 Requirements

The IRS requires that nonprofit organizations must meet specific requirements before earning 501c3 status. Some of the basic essentials include:

  • Avoid any purpose that praises or calls for discrimination;

  • Must have obtained an official status as an association, corporation, or trust;

  • Provide a reason for their desire to seek tax exemption;

  • Three-years of existence before applying;

  • Earnings and funds raised by the outlet can’t benefit a sole member;

  • Profits must be used for charitable activities;

  • Political involvement should be avoided;

  • Sole purpose is to meet public needs.

These areas are covered on the required application form (Form 1023), and it’s important that the organization completes all sections to avoid status delays. The IRS also requires financial records to apply for 501c3 status to ensure that the charity’s funds have been used appropriately and follows the requirements outlined above.

Benefits Do 501c3 Nonprofits Enjoy

Along with federal tax exemptions, 501c3 nonprofits usually receive exemptions from state and local sales and property taxes as well. Other areas that they often receive discounts include postage and advertising. They’re also exempt from lawsuits.

One of the biggest advantages of 501c3 tax status is the ability to deduct donations on taxes. This benefits the donors as well as the charity because they’re more likely to give when there’s a tax break.

Restrictions on Activities

While nonprofit 501c3 entities benefit from a long list of perks, they’re also heavily regulated by the IRS. One area of restriction pertains to the ruling body of the organization and requires that they follow these rules:

  • No one person, whether it is an officer or general member, can benefit from the institution financially.

  • All capital earned by organization must be passed on to another nonprofit entity and not a single member upon disbandment.

  • Interference with political campaigns or officially endorsing a candidate is prohibited.

  • Lobbying must be kept to a minimum, and only a small fraction of the organization’s funds can be used toward the process.

Failing to follow these restrictions can result in the termination of a company’s tax status.

Compliance on 501c3 Status

Once a charity receives 501c3 status, they must comply with the IRS’ guidelines and requirements to maintain their identifier. While this entails following the general rules of the tax code, it also requires certain documentation to be completed on a yearly basis. Form 990 is one common example of federal compliance, but state and local governments usually have their own compliance stipulations.

Requirements to Maintain 501C3 Status

To maintain 501c3 status, the organization must follow all the rules outlined by the federal government. In the event that the charity decides to change its focus area, the group needs to file a Form 5768 in order to keep their nonprofit, tax-exempt status. However, they’ll be required to follow the same regulations as before.

As mentioned above, 501c3 organizations need to file Form 990 during tax time. This report outlines the income made by the entity. Any money earned from activities not directly corresponding with the charity focus of the institution much be reported on the income tax form, and it may also be taxed.

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