Key Takeaways:

  • 501c vs 501c3 Differences: Both are tax-exempt, but only 501(c)(3) organizations allow tax-deductible donations.
  • Types of 501(c) Organizations: Includes categories like 501(c)(4) for social welfare groups and 501(c)(6) for business leagues.
  • Eligibility for Tax Exemption: Nonprofits must apply for federal or state tax exemption and meet specific IRS criteria.
  • Restrictions on 501(c)(3) Organizations: Limited lobbying, no profit distributions to individuals, and strict asset distribution rules upon dissolution.
  • Additional 501(c) Classifications: Various 501(c) categories exist beyond 501(c)(3), each serving different organizational needs.

Updated May 5, 2022:

Many people think that 501(c) and 501(c)(3) means the same thing, but they are actually two different tax categories in the Internal Revenue Code. Both of them exempt organizations from paying corporate income taxes. However, a 501(c) organization may not allow its donors to write off donations while a 501(c)(3) organization lets its donors take tax deductions on their contributions.

An Overview of Tax Exemption

A nonprofit organization with a tax-exempt status is not required to pay corporate tax on income that comes from activities that are sufficiently related to its purposes. There is a common misconception that a tax-exempt nonprofit organization is a 501(c) or 501(c)(3) organization. In actuality, these letters and numbers refer to specific tax categories in the Internal Revenue Code.

Whether it is incorporated or unincorporated, a nonprofit organization is not automatically entitled to federal or state tax exemption. In order to be exempt, the organization is required to meet certain requirements and apply for tax exemption with the IRS and the state. It can become a state nonprofit organization to be exempt from certain state taxes but choose not to become a federal nonprofit organization.

Once a nonprofit organization is incorporated, it can apply for federal tax exemption with the IRS or the state. To be eligible for tax-exempt status, the nonprofit must belong to one of the 28 categories of nonprofit organizations, such as research, trade, and religious organizations.

After becoming a nonprofit corporation, it may apply for federal tax exemption. The process involves obtaining a federal tax identification number and applying for 501(c) or tax-exempt status with the IRS. For instance, a trade association will be granted a 501(c)(6) status, while a community recreation organization will receive a 501(c)(4) designation.

While a 501(c) organization does not have to pay taxes on certain kinds of income, it may not be granted a charitable status that enables its donors to write off taxes. The tax-exempt status of a 501(c)(3) organization is granted by the IRS. Learn more about the differences between 501(c) and 501(c)(3).

Types of 501(c) Organizations

Content:The IRS recognizes multiple types of 501(c) organizations beyond 501(c)(3), each designed for different purposes. Some notable categories include:

  • 501(c)(4) – Social Welfare Organizations: These nonprofits focus on promoting social welfare and can engage in lobbying. However, donations are not tax-deductible.
  • 501(c)(5) – Labor, Agricultural, and Horticultural Organizations: These groups aim to improve labor conditions, agriculture, or horticulture.
  • 501(c)(6) – Business Leagues, Chambers of Commerce, and Trade Associations: These groups promote business interests but do not qualify for tax-deductible donations.
  • 501(c)(7) – Social and Recreational Clubs: These organizations, such as country clubs and hobbyist groups, serve social purposes but cannot accept tax-deductible contributions.

Each classification has specific benefits and limitations. Choosing the right structure ensures compliance with IRS regulations while meeting the organization's goals​.

What Is 501(c)?

A 501(c) organization is regarded as a charity that allows its donors to take tax deductions for contributions of cash, goods, and other assets. A 501(c)(6) organization, on the other hand, is an entity that primarily seeks to promote the interests of a certain group of businesspeople instead of the public good. As such, the donations it receives are not tax-deductible. This the reason why many trade associations choose to form 501(c)(3) foundations. These foundations solicit funds for education, research, or scholarships.

Both 501(c)(3) and 501(c)(6) organizations are allowed to make a profit from their operations. Nonetheless, if they consistently make substantial annual profits, the IRS may remove their tax-exempt status. Therefore, a tax-exempt organization will try to operate near or at a break-even basis.

501(c) Tax Exemptions and Limitations

While all 501(c) organizations receive tax-exempt status, some income may still be taxable. If a 501(c) organization engages in unrelated business income (UBI)—income from activities not substantially related to its exempt purpose—it must file a Form 990-T and pay Unrelated Business Income Tax (UBIT).

Additionally, 501(c) organizations must adhere to strict non-profit regulations, ensuring no earnings benefit private shareholders or individuals. However, some 501(c) groups can engage in lobbying and political activities, depending on their classification. For example, 501(c)(4) organizations can engage in political advocacy, unlike 501(c)(3) charities​​.

What Is 501(c)(3)?

An organization with a 501(c)(3) status starts out as a nonprofit corporation and then becomes a charity that is exempt from federal taxes. It is not subject to income and sales taxes and lets its donors write off their contributions. Some nonprofit organizations and many for-profit organizations form related 501(c)(3) organizations to perform charitable work.

501(c)(3) is the most common tax status among nonprofit organizations. In order to qualify for this status, an organization is required to fit into a tax-exempt purpose that is defined by the IRS (see 501(c)(3) requirements). Examples of such a purpose include:

  • Charitable
  • Educational
  • Religious
  • Scientific
  • Literary
  • Public safety testing
  • Fostering of international or national amateur sports competition
  • Prevention of cruelty to children and animals

Requirements for 501(c)(3) Status

To qualify for 501(c)(3) status, organizations must:

  1. Serve a Charitable Purpose: The IRS defines eligible purposes, including education, religion, science, and public safety.
  2. Ensure No Private Benefit: No earnings may benefit private individuals or shareholders.
  3. Limit Lobbying and Political Activities: Excessive lobbying can jeopardize tax-exempt status, and direct political endorsements are prohibited.
  4. Follow Dissolution Guidelines: Upon dissolution, assets must be distributed to another 501(c)(3) organization rather than individuals or private entities​.

Any profit that is generated through the organization's activities cannot benefit any of its directors or officers, or other individuals. However, this does not mean that its directors and officers cannot be paid for their work. Unlike a regular corporation where shareholders and directors receive distributions of profits, a 501(c)(3) organization cannot issue dividends.

In addition, in the event that the organization shuts down, its assets cannot be distributed to any individual. A 501(c)(3) organization is also required to keep propaganda, lobbying, or other legislative activity to an insubstantial level, which is generally 10 to 20 percent of its activities.

Frequently Asked Questions

1. What is the main difference between 501(c) and 501(c)(3)?

501(c) is a broad tax-exempt category, while 501(c)(3) is specifically for charitable organizations that allow tax-deductible donations.

2. Can a 501(c)(3) organization lobby?

Yes, but only within limits. Excessive lobbying or political campaigning can result in the loss of tax-exempt status.

3. Are all donations to 501(c) organizations tax-deductible?

No, only donations to 501(c)(3) organizations qualify for tax deductions. Contributions to other 501(c) organizations do not.

4. Can a nonprofit switch from 501(c)(6) to 501(c)(3)?

Yes, but it requires significant restructuring to meet 501(c)(3) criteria, including restrictions on lobbying and asset distribution.

5. What happens if a 501(c)(3) organization generates excess income?

It must be reinvested in the nonprofit’s mission. Excessive profits without clear reinvestment may result in IRS scrutiny.

If you need help understanding the difference between 501(c) and 501(c)(3), 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.