How the IRS Classifies Nonprofit Organizations
Where Does Your Organization Fit?
Nonprofits are ubiquitous in the U.S. Yet, people rarely understand how nonprofit organizations are organized, how they are recognized by the IRS, or what they do.
How It Works
The IRS recognizes 27 types of nonprofit organizations as 501(c) organizations. Also, there are several more 501 nonprofit types with various designations, such as 501K and 501N, which are also tax-exempt.
All 501s are, to one degree or another, exempt from federal taxes and many state taxes. Each type is different when it comes to eligibility, lobbying, political activity, and tax-deductible contributions.
A separate subsection of the 501(c) section of the tax code rules each type of nonprofit.
With so many types of nonprofits, they are hard to avoid. For instance, the Chamber of Commerce your small business might belong to is a 501(c)(6). Your credit union might be a 501(c)(1). And the local veterans association is likely a 501(c)(19).
The most familiar type of nonprofit organization is 501(c)(3). These are the nonprofits we most commonly contribute to, volunteer for, and hear about through the media.
We most likely think about the 501(c)(3) classification when we do our taxes. Was that donation made to a tax-exempt nonprofit charity or not?
Below is a list of the types of nonprofits that the IRS recognizes.
The common theme for all nonprofits is that they are not organized solely for profit. They instead serve a social purpose.
The following information comes from IRS Publication 557, your bible if you are considering filing for nonprofit status. Also, IRS Publication 526 provides information about which of these organizations can provide a tax deduction for contributions. Check out these publications for more specific details on nonprofit classifications.
These organizations have been organized under an Act of Congress.
- Federal credit unions are an excellent example of this type of nonprofit.
- These nonprofits do not have have to apply for tax exemption since Congress created them. Neither must they file an annual return (IRS Form 990).
- Tax-exempt contributions are allowed if they are made for exclusively public purposes.
These organizations are holding corporations for exempt organizations. That is, they can hold title to the property of an exempt group.
- They apply for nonprofit status using IRS Form 1024.
- They annually file Forms 990 or 990-EZ.
- Contributions not tax-deductible.
This type of tax-exempt organization is the most familiar with the general public. It includes organizations that are religious, educational, charitable, scientific, and literary, groups that test for public safety, organizations that foster national or international amateur sports competition, or organizations engaged in the prevention of cruelty to children or animals.
- A 501(c)(3) applies for its status using IRS Form 1023. An exception to this requirement is churches. A bona fide church does not have to apply for tax-exemption.
- Files annually Form 990, 990-EZ, or 990-PF.
- Contributions are usually tax-exempt.
All 501(c)(3) organizations are considered either:
- A private foundation. These are nonprofits that don't qualify as public charities. Foundations may be sub-classified as private operating foundations or private non-operating foundations and receive some of the advantages of public charities.
- Or a public charity. These are the organizations to which we typically donate and that have broad public support.
These organizations are civic leagues, social welfare organizations, and local associations of employees. They promote community welfare, charitable, education, or recreational goals.
- Must provide notice on Form 8976; may also submit Form1024-A
- They file annually 990 or 990-EZ.
- Contributions are not tax-deductible. However, a 501(c)(4) may set up a 501(c)(3) charitable fund to accept tax-deductible contributions.
- This type of nonprofit is often confused with the 501(c)(3). But they are very different, especially regarding permissible political activity.
Labor, agricultural, and horticultural organizations fit under this classification. They are educational or instructive to improve conditions of work, products, and efficiency. They apply by using IRS Form 1024 and file annually using Form 990 or 990-EZ.
This classification includes business leagues, chambers of commerce, real estate boards, boards of trade, or professional football leagues. They seek to improve business conditions for their members. They apply using IRS form 1024 and file the 990 or 990EZ annually.
Social and recreation clubs fall into this category. They promote pleasure, recreation, and social activities for their members. They apply using IRS form 1024 and file the 990 or 990-EZ annually. These organizations are supported through membership fees, not donations.
This category includes fraternal beneficiary societies and associations. They provide for the payment of life, sickness, accident, or other benefits to members. They apply using IRS Form 1024 and file the 990 or 990-EZ annually.
These groups are voluntary employees' associations. They provide for the payment of life, sickness, accident, or other benefits to members.
- The IRS groups the 501(c)(9), 501(c)(4), and 501(c)(17) together when the latter two are employees' associations.
- They apply using IRS Form 1024.
- They file the 990 or 990-EZ annually.
This category is similar to 501(c)(8) but applies to domestic fraternal societies and associations. They devote their net earnings to charitable, fraternal, and other specified purposes, but no life, sickness, or accident benefits to members. Apply by letter using IRS form 1024 and file the 990 or 990-EZ annually.
Teacher's Retirement Fund Associations. Associations for payment of retirement benefits. Apply using a letter to the address shown on Form 8718. Files the 990 or 990-EZ annually.
Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies, and similar organizations. Uses Form 1024 for application. Files the 990 or 990-EZ annually.
Cemetery companies. Nonprofit cemetery companies provide perpetual care of burial plots for the owners of those burial plots.
- Plots should be for the personal use of the owner, not sold.
- Uses Form 1024 for application. Files the 990 or 990-EZ annually.
- May accept tax-exempt donations, but not for the care of specific burial plots.
State-chartered credit unions, mutual reserve funds. These organizations make loans to members. Application is by letter to the address shown on Form 8718. A copy of the organizing document should be attached and the letter should be signed by an officer. Files the 990 or 990-EZ annually .
Mutual insurance companies or associations. These organizations provide insurance to members at cost, Applies using Form 1024. Files the 990 or 990-EZ annually.
Cooperative organizations to finance crop operations in conjunction with the activities of a marketing or purchasing association. Apply with Form 1120-C and letter. Files the 990 or 990-EZ annually.
Supplemental unemployment benefit trusts provide for payment of supplemental unemployment compensation benefits. Apply using Form 1024. Files the 990 or 990-EZ annually.
Employee-funded pension trust (created before June 25, 1959). These trusts pay benefits under a pension plan funded by employees. Apply with a letter. Files the 990 or 990-EZ annually.
Post or organization of past or present members of the armed forces.
- Activities vary according to the type of organization.
- Applies using Form 1024. Files the 990 or 990-EZ annually.
- Contributions are deductible only if 90% or more of the organization's members are war veterans
Black lung benefit trusts. These organizations are funded by coal mine operators to satisfy their liability for disability or death due to black lung diseases.
- Must file its application by letter with a copy of its trust instrument.
- Reports on Form 990-BL (Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons).
- No tax-deductible contributions, but may be allowed as a business expense.
Withdrawal liability payment fund. Provides funds to meet the liability of employers withdrawing from a multi-employer pension fund. Apply with a letter to the address shown on Form 8718. Submits Forms 990 or 990-EZ annually.
Veterans organization (created before 1880). Provides insurance and other benefits to veterans.
- Apply with a letter to the address shown on Form 8718. Include a copy of the organizing document.
- File annual tax forms 990 or 990-EZ.
- Contributions to these organizations may be deducted only if 90% or more of the organization's members are war veterans.
Title-holding corporations or trusts with multiple parents. An organization holding title to property and paying income from that property to 35 or fewer parents or beneficiaries. Applies with form 1024. Files Forms 990 or 990-EZ.
A state-sponsored organization providing health care coverage for high-risk individuals. Apply with a letter to the address shown on Form 8718. Files tax forms 990 or 990-EZ annually.
State-sponsored workers’ compensation reinsurance organization. Reimburses members for losses under workers’ compensation acts. Apply with a letter to the address shown on Form 8718. Files Form 990 or 990-EZ.
National railroad retirement investment trust. Manages railroad retirement funds. No form required to apply. Files Form 990 each fiscal year.
CO-OP health insurance issuers. Qualified health insurance issuers with loans or grants under the CO-OP program. Applies with letter and Form 8718. Files tax form 990.
Religious and apostolic associations. These groups are religious-based organizations.
- A defining characteristic of these groups is that they share a common treasury by pooling income from all the members for tax purposes.
- Unlike churches, which are 501(c)(3), political activities are not restricted. Therefore, donations are not tax-exempt. A 501(d) may establish a separate 501(c)(3) charitable organization for the purpose of raising funds
- No application form is required. Files Form 1065.
Cooperative hospital service organizations. These groups provide cooperative services for hospitals. They use Form 1023 to apply and file Forms 990 or 990-EZ. Tax-deductible donations are allowed.
Cooperative service organizations of operating educational organizations. These groups provide collective investment services for educational organizations. They Apply with form 1023. They file Forms 990 or 990-EZ. Tax-deductible donations are allowed.
Child care organizations that provide care for children. Applies for tax-exemption with Form 1023. Files Forms 990 or 990-EZ. Unlike commercial or privately-owned daycare organizations, the 501(K) may accept tax-exempt donations.
These organizations are charitable risk pools. They pool certain insurance risks of 501(c)(3) organizations. They apply with form 1023 and use tax form 990 or 990-EZ. Tax-deductible contributions are allowed.
Credit counseling organizations. These organizations provide credit counseling services. They apply with Form 1023 and submit annual Form 990 or 990-EZ.
Farmers’ cooperative associations. These groups perform cooperative marketing and purchasing for agricultural producers. Applies using Form 1028. Tax form 990-C.
These are partisan political organizations, such as a political party, committee, fund, or association. They may be either incorporated or not.
- They directly or indirectly accept contributions or make expenditures for political campaigns.
- However, donations are not tax-deductible, and, unlike the similar 501(c)(4) organization, donors must be disclosed.
- They apply for tax-exemption with form 8871 and file tax forms 1120-POL (when they have taxable income), 9902, or 990-EZ8.
If you need further help on determining your filing classification or how to file, use sources such as the IRS, and consult with legal counsel or an accountant for advice.