501c3 Rules: Everything You Need to Know
501c3 rules are the Internal Revenue Service (IRS) guidelines set forth to regulate the activities of certain non-profit organizations. 501c3 tax status is awarded to charitable organizations and provides them exemption from federal taxes.
There are a wide variety of federal non-profit tax codes, spanning from (1) to (28). 501c3 is one of the most popular yet restrictive tax codes. Some common examples of organizations that fall into this group include trusts and public foundations, but the most popular type of institution is non-profit corporations.
This type of non-profit tax code stands apart from its counterparts because of the donation exemptions. Individuals or companies that donate to 501c3 organizations are able to deduct the contribution on their taxes. The majority of state governments also allow tax deductions for donations, making gifts to non-profit entities under this category appealing to many donors.
501c3 institutions can also benefit from state tax reductions such as sales and property fees. Other outlets, like the Post Office, also provide discounts for certain types of groups.
Types of 501c3 Organizations
Organizations with 501c3 statuses span a wide variety of industries and service types. One of the main distinguishers of a public charity, at least according to the IRS, is that it isn’t a private foundation. They’re many other things that they look for to approve companies for tax-exemption, and they place a heavy focus on revenue sources.
The bulk of a public non-profit’s revenue must be provided by public donations or government entities, and one-third of the public donors must be composed of a broad range of backgrounds and classes. The IRS does allow that funds be obtained from individuals as well as companies, and it can also come from other types of charities. Individual donors can write off donations up to amounts that equal half of their yearly income while corporations can only deduct up to 10% of their income.
There are many similarities between public and private non-profit organizations, but there are specific differences that the IRS looks for when determining status. While most private organizations are run by families, the rules for a 501c3 charity demand that the majority of the company’s board members are not related.
Private organizations aren’t known for their continuously active programs, which is another stipulation for public entities. While they may not technically be active, many private foundations fund the activities of public groups through the use of grants. However, their donor base is usually much smaller than their counterparts because they don’t face the same variety of restrictions. Donors also don’t receive the same deduction opportunities as the IRS limits the claims to 30% of their income.
It’s not impossible for private foundations to earn 501c3 status, especially if they’re practices result in a hybrid organization, but they’re the smallest type of institution among (3) tax codes. If they do in fact qualify, their donors are able to reap the same tax deduction benefits.
Restrictions on Activities
501c3 organizations face extensive restrictions that are much tougher than other 501c tax code categories. Some of these rules include:
Individual members or leaders can’t benefit financially from the programs and activities of the organization;
The assets of a dissolved company much transfer to another 501c3 organization and not to any one person;
Lobbying should be limited and only use a small percentage of the budget.
The IRS also prevents organizations from making official ties to political campaigns including candidate endorsements.
Obtaining 501(c)(3) Status
In order to obtain 501c3 status, the company or organization needs to complete and file Form 1023. Small entities or those with limited income can use the 1023-EZ Form if they meet the minimal requirements.
The IRS requires companies with early earnings of $10,000 or more to pay an $875 filing fee. Organizations with lower revenues are only charged $400 for the application process, but certain entities, like religious institutions, can avoid the entire process as they aren’t required to apply.
If you have questions regarding 501c3 rules, you can post your legal need on UpCounsel’s marketplace. UpCounsel only works with lawyers from top law schools including Yale and Harvard Law. Only the top 5 percent are accepted as site members, and their average experience is 14 years, which includes working with the top companies in the country such as Google, Stripe, and Twilio.