Key Takeaways

  • Tax-exempt status under 501(c)(3) provides exemptions from federal, state, and local taxes, enhancing financial sustainability.
  • Donations made to 501(c)(3) nonprofits are tax-deductible for donors, which encourages greater charitable contributions.
  • Tax-exempt organizations gain credibility, making it easier to secure grants and public support.
  • Fringe benefits, operational cost savings, and liability protection offer long-term organizational advantages.
  • There are legal and administrative responsibilities, including regulatory compliance and financial transparency.

Some benefits of a 501(c)(3) status are exemptions from the following taxes:

  • Federal taxes
  • Local taxes
  • Property taxes
  • Sales taxes
  • Payroll taxes

Who Grants and Who Can Be Granted 501(c)(3) Status?

The IRS (Internal Revenue Service) grants the 501(c)(3) status to nonprofit organizations. Some of the missions that qualify a nonprofit organization for 501(c)(3) status are as listed below:

  • Charity
  • Religion
  • Education
  • Animal welfare
  • Anti-child abuse
  • Public safety testing

More Perks of a 501(c)(3) Status

  1. You can make a living while trying to make the world a better place because nonprofits can fetch a steady income. You also have the benefit of a sense of fulfillment for bettering the world.
  2. A nonprofit can enjoy lower postage rates for mailing more than 250 similar copies of mail.
  3. A nonprofit with a 501(c)(3) status can benefit from free (but limited) public service announcements on TV and radio.
  4. The directors and officers of nonprofits with 501(c)(3) status can enjoy limited liability for the operation of the organization. A few exceptions are unpaid taxes and gross negligence, for instance.
  5. An organization with a 501(c)(3) status continues to exist even after the death of its founder(s).
  6. An organization with 501(c)(3) status can also benefit from available private and government grants.
  7. Various employee fringe benefits that aren't typically available to business owners and self-employed persons are available to the founders and staff of organizations with 501(c)(3) status. Some examples of such benefits are health insurance, group life insurance, payment of approved corporate retirement and pension plans, and other medical expenses.
  8. Certain businesses and stores offer discounts to nonprofits and their employees. Some publications also offer nonprofits advertising discounts.
  9. Walmart, for instance, like many other businesses and stores, readily offers nonprofits and their staff discounts if they're able to present a copy of their 501(c)(3) status document issued by the IRS.
  10. The moment your organization achieves 501(c)(3) status, it is permanent. You'll never have to renew it.

Sales and Property Tax Exemptions

Beyond federal income tax exemption, many states offer sales and property tax exemptions to 501(c)(3) organizations. These benefits vary by state but may include:

  • Sales tax exemptions on purchases used in the organization’s charitable mission (e.g., educational materials, supplies).
  • Property tax exemptions for real estate used for charitable activities.
  • Reduced or waived business license fees and other local tax relief programs.

Check with your state’s tax authority for specific requirements and application processes.

Enhanced Fundraising Opportunities

One of the most valuable benefits of tax exempt status is the ability to receive tax-deductible donations. This not only motivates individual donors to give more generously but also qualifies the nonprofit for a wider range of funding sources:

  • Eligibility for public and private grants: Many foundations and corporate giving programs only fund 501(c)(3) organizations.
  • Corporate matching gift programs: Corporations may match their employees’ donations if the receiving nonprofit is tax-exempt.
  • Planned giving and endowments: Donors are more willing to make large, legacy-based contributions when tax benefits are involved.

Increased Credibility and Public Trust

Obtaining 501(c)(3) status signals that your organization meets the IRS’s strict requirements for nonprofit operation, which increases credibility in the eyes of the public. Donors, grantmakers, and the community often see IRS-recognized nonprofits as more trustworthy and transparent, boosting overall confidence in your mission. This trust can open doors to partnerships and attract skilled volunteers who are more likely to support causes they perceive as legitimate.

A 501(c)(3) Status for Churches

For religious organizations like churches and their congregations, only pastors can benefit from certain tax benefits. A church has to have 501(c)(3) status in order to have a group exemption for the branches and extensions under it. If a church has to invite a pastor from a foreign country to the U.S. to preach or oversee a church, it would be more expensive and would take longer to accomplish if the church didn't have 501(c)(3) status. The Bill Emerson Good Samaritan Act requires all nonprofit organizations, including churches, to acquire a 501(c)(3) status in order to enjoy its benefits.

The Bill Emerson Good Samaritan Act

Through the Bill Emerson Good Samaritan Act, Congress excuses food organizations, such as restaurants and other kinds, from criminal and civil liability associated with food donation to nonprofit organizations that aid needy individuals. The act protects donors in every U.S. state from criminal and civil liability for their contributions of “apparently wholesome food” made in good faith. However, such donations are expected to satisfy every quality and labeling regulation imposed by the government even if the food isn't marketable owing to age, lack of freshness, appearance, size or some other condition.

Disadvantages of a 501(c)(3) Status

  1. It takes a lengthy, complicated process to apply and qualify for a 501(c)(3) status. Furthermore, it requires multiple payments.
  2. It requires compliance with various regulatory demands, some of which are the annual submission of reports to state and federal agencies.
  3. Profits can't be divided equally. Managers can only earn reasonable salaries.
  4. It can't pay its board of directors.
  5. It has the responsibility of distributing its assets to other nonprofits if it gets dissolved.

Required Ongoing Compliance and Transparency

Maintaining 501(c)(3) status requires consistent compliance with federal and state regulations. This includes:

  • Filing annual IRS Form 990 or 990-EZ to maintain transparency and provide financial accountability.
  • Adhering to strict rules on political activity: 501(c)(3) organizations are prohibited from endorsing or opposing political candidates.
  • Properly documenting charitable contributions, especially those over $250, to ensure donor tax deductions are valid.

Failure to comply can result in penalties or revocation of tax-exempt status.

A Corporation or a Nonprofit With a 501(c)(3) Status?

If you aren't sure whether to file as a corporation or a nonprofit with a 501(c)(3) status, consider the following questions:

  • Does flexibility mean more to your organization than cost benefits?
  • Will investors be attracted to your organization by potential ROI (return on investment) or will your organization raise funds more easily by being able to receive donations with tax exemption?
  • Can your organization attract competent leadership with limited compensation?
  • In spite of the paperwork-related hassle involved in filing as a nonprofit organization with a 501(c)(3) status, will your organization be able to concentrate on your cause or mission?

Considerations for Choosing Tax-Exempt Status

When weighing whether to pursue 501(c)(3) status, organizations should consider their long-term mission, funding model, and administrative capacity. Ask yourself:

  • Will your nonprofit rely heavily on grants and donations?
  • Can your organization manage the recordkeeping and reporting requirements?
  • Is maintaining donor trust and transparency critical to your success?

Frequently Asked Questions

1. What is the main benefit of tax exempt status for a nonprofit? The primary benefit is exemption from federal income tax, allowing more funds to go directly toward the nonprofit’s mission.

2. Are donations to a 501(c)(3) organization tax-deductible? Yes, donations are generally tax-deductible for the donor, which encourages more charitable giving.

3. Do all states automatically recognize IRS tax-exempt status? No, nonprofits often need to apply separately for state-level tax exemptions such as sales or property tax relief.

4. What forms must a 501(c)(3) organization file annually? Most organizations must file IRS Form 990, 990-EZ, or 990-N depending on their size, as well as any state-required reports.

5. Can a nonprofit lose its tax-exempt status? Yes, failure to file annual returns or violating IRS regulations can lead to revocation of 501(c)(3) status.

While the benefits of tax exempt status can be transformative, they come with significant responsibilities that demand strategic planning and legal guidance. If you need legal assistance, you can find an experienced attorney on UpCounsel to help navigate the application and compliance process.

If you need help with the benefits of a 501(c)(3) status, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.