What Is a 501(c)(3) Tax-Exempt Organization?
Definitions and Examples of 501(c)(3) Organizations
Many nonprofits that are covered by Section 501(c) of the Internal Revenue Code are 501(c)(3) organizations. This is the most common type of organization, and it can be a charitable nonprofit, a public nonprofit, or simply a charity.
Many of these organizations receive an exemption from federal taxes, but they must apply for 501(c)(3) status and they must qualify. And not all nonprofits are tax-exempt.
What Is a 501(c)(3) Organization?
An organization must serve one or more purposes to achieve tax exemption as a 501(c)(3) nonprofit. Acceptable purposes include:
- Testing for public safety
- Fostering amateur sports competition
- Preventing cruelty to children or animals
These organizations must further be able to explain how they serve the public good. They must establish that they're organized and operated for a specific approved purpose. Some examples of the specific goals of 501(c)(3) organizations that have been cited by the IRS include:
- Relief of the poor, the distressed, or the underprivileged
- Advancement of religion
- Advancement of education or science
- Erection or maintenance of public buildings, monuments, or works
- Lessening the burdens of government
- Lessening of neighborhood tensions
- Elimination of prejudice and discrimination
- Defense of human and civil rights secured by law and
- Combating community deterioration and juvenile delinquency
Qualifying organizations for the charitable designation include nursing homes, parent/teacher associations, charitable hospitals, some schools, the Red Cross, the Salvation Army, and churches.
- Alternate name: Nonprofit
How Does Tax Exemption Work?
The tax exemption granted to these organizations allows them to receive grants from private foundations and from the government. They can provide tax deductions to individual donors and can receive special postage rates, nonprofit advertising rates, and other discounts.
Tax exemption also provides limited protection from lawsuits. A charitable organization usually incorporates before seeking tax exemption, so lawsuits can only apply to its corporate assets. Staff and board members enjoy legal protection, although that protection might not cover all situations.
Nonprofits should nonetheless purchase certain types of insurance, such as property insurance and worker's compensation.
Types of 501(c)(3) Organizations
There are two basic types of 501(c)(3) organizations. One is a public charity which the IRS defines as “not a private foundation.” Public charities receive most of their income from the general public or from the government. Public support must be broad rather than limited to just a few individuals or families.
The second category is a private foundation. Foundations receive their income from investments and endowments rather than from the general public.
Disadvantages of 501(c)(3) Organizations
Nonprofit status isn't right for every organization. Income-producing activities not related to the group’s nonprofit purpose are limited.
The IRS examines unrelated income and a nonprofit might have to pay taxes and penalties if it's large.
After paying creditors, a nonprofit must give its remaining assets to another exempt organization if it closes.
Requirements for 501(c)(3) Tax-Exempt Status
A 501(c)(3) organization must meet several additional requirements to receive the benefits of tax exemption, including being operated solely for exempt purposes. The organization can't be operated for the benefit of any private interest; its net earnings can't benefit any private shareholder or individual. Nonprofits can make a profit, but that profit must support only charitable purposes.
How to Apply for 501(c)(3) Status
You should incorporate as a nonprofit in your state first, but you also have the option of becoming an unincorporated nonprofit association.
You can then use one of two possible applications to apply for tax-exempt status. Most nonprofits use Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. But you might qualify to use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code if your organization is small.
You can determine if you qualify for this easier, streamlined option by filling out the eligibility worksheet.
File IRS Form 1023 or 1023-EZ within 27 months to receive tax exemption dating from the date of your incorporation. Your exemption will only be valid from the application's postmark date if you wait any longer.
You can file for an extension of the 27-month deadline by explaining why you failed to complete the 1023 application process on time. The instructions for Form 1023 list acceptable reasons for late filing, including bad advice or inadequate information from a lawyer, accountant, or IRS employee.
Three groups are not required to file Form 1023:
- Public charities that don't have gross receipts of more than $5000 in each year
- Subordinate organizations that are exempt under a group exemption letter
- A 501(c)(3) organization is a nonprofit that enjoys special, tax-exempt status.
- These organizations are obligated to serve the public good.
- Nonprofits can receive grants from the government and from private foundations due to their tax-exempt status, and they receive several discounts as well, from postage to advertising rates.
- The organization can’t be operated for the benefit of any private interest.
This article is provided solely for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant for advice.
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IRS. "How to Lose Your 501(c)(3) Tax-Exempt Status (Without Really Trying)." Accessed July 15, 2020.
IRS. "Publication 557, Tax-Exempt Status for Your Organization." Page 23. Accessed July 15, 2020.
IRS. "Publication 557, Tax-Exempt Status for Your Organization." Page 24. Accessed July 15, 2020.