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501(c) organization

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A 501(c) organization, also known colloquially as either a 501(c) or a "nonprofit", is an American tax-exempt nonprofit organization. Section 501(c) of the United States Internal Revenue Code (26 U.S.C. § 501(c)) provides that 28 types of nonprofit organizations are exempt from some federal income taxes. Sections 503 through 505 set out the requirements for attaining such exemptions. Many states refer to Section 501(c) for definitions of organizations exempt from state taxation as well.

Types

According to the IRS Publication 557, in the Organization Reference Chart section, the following is an exact list of 501(c) organization types and their corresponding descriptions.[1]

  • 501(c)(1) — Corporations Organized Under Act of Congress (including Federal Credit Unions)
  • 501(c)(2) — Title Holding Corporation for Exempt Organization[2]
  • 501(c)(3) — Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations
  • 501(c)(4) — Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
  • 501(c)(5) — Labor, Agricultural, and Horticultural Organizations
  • 501(c)(6) — Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
  • 501(c)(7) — Social and Recreational Clubs
  • 501(c)(8) — Fraternal Beneficiary Societies and Associations
  • 501(c)(9) — Voluntary Employee Beneficiary Associations
  • 501(c)(10) — Domestic Fraternal Societies and Associations
  • 501(c)(11) — Teachers' Retirement Fund Associations
  • 501(c)(12) — Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, etc.
  • 501(c)(13) — Cemetery Companies
  • 501(c)(14) — State-Chartered Credit Unions, Mutual Reserve Funds
  • 501(c)(15) — Mutual Insurance Companies or Associations
  • 501(c)(16) — Cooperative Organizations to Finance Crop Operations
  • 501(c)(17) — Supplemental Unemployment Benefit Trusts
  • 501(c)(18) — Employee Funded Pension Trust (created before June 25, 1959)
  • 501(c)(19) — Post or Organization of Past or Present Members of the Armed Forces
  • 501(c)(21) — Black lung Benefit Trusts
  • 501(c)(22) — Withdrawal Liability Payment Fund
  • 501(c)(23) — Veterans Organization (created before 1880)
  • 501(c)(25) — Title Holding Corporations or Trusts with Multiple Parents
  • 501(c)(26) — State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
  • 501(c)(27) — State-Sponsored Workers' Compensation Reinsurance Organization
  • 501(c)(28) — National Railroad Retirement Investment Trust
  • 501(c)(29) — Qualified Nonprofit Health Insurance Issuers (Created in section 1322(h)(1) of the Affordable Care Act)[3]

General compliance issues

Under Section 511, a 501(c) organization is subject to tax on its "unrelated business income", whether or not the organization actually makes a profit, but not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games.[4] Disposal of donated goods valued over $2,500, or acceptance of goods worth over $5,000 may also trigger special filing and record-keeping requirements.

Note that "tax exempt" also does not excuse an organization from maintaining proper records and filing any required annual or special-purpose tax returns.[5] Previously, annual returns were not generally required from an exempt organization accruing less than $25,000 in gross income yearly.[6] However, from 2008 onwards, many such organizations must file a yearly "e-Postcard" known as Form 990-N, or risk losing their exemption.[7]

Failure to file required returns such as Form 990 (Return of Organization Exempt From Income Tax) may result in monetary fines of up to $250,000 per year. Exempt or political organizations (excluding churches or similar religious entities) must make their returns, reports, notices, and exempt applications available for public inspection. The organization's Form 990 (or similar such public record as the Form 990-EZ or Form 990-PF) is generally available for public inspection and photocopying at the offices of the exempt organization, through a written request and payment for photocopies by mail from the exempt organization, or through a direct Form 4506-A Request for Public Inspection or Copy or Political Organization IRS Form request to the IRS of the exempt organization filing of Form 990 for the past three tax years. The Form 4506-A also allows the public inspection and/or photocopying access to Form 1023 Application for Recognition of Exemption or Form 1024, Form 8871 Political Organization Notice of Section 527 Status, and Form 8872 Political Organization Report of Contribution and Expenditures. Internet access to an organization's 990 and some other forms is available through information services such as GuideStar.

Failure to file such timely returns and to make other specific information available to the public also is prohibited.[8]

501(c)(3)

501(c)(3) exemptions apply to corporations, and any community chest, fund, cooperating association or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals.[9][10] There are also supporting organizations which are often referred to in shorthand form as "Friends of" organizations.[11][12][13][14][15]

Another provision, 26 U.S.C. § 170, provides a deduction, for federal income tax purposes, for some donors who make charitable contributions to most types of 501(c)(3) organizations, among others. Regulations specify which such deductions must be verifiable to be allowed (e.g., receipts for donations over $250). Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging to a charity's continued operation, as many foundations and corporate matching programs do not grant funds to a charity without such status, and individual donors often do not donate to such a charity due to the unavailability of the deduction.

Testing for public safety is described under section 509(a)(4) of the code, which makes the organization a public charity and not a private foundation,[16] but contributions to 509(a)(4) organizations are not deductible by the donor for federal income, estate, or gift tax purposes.

The two exempt classifications of 501(c)(3) organizations are as follows:[17]

A public charity, identified by the Internal Revenue Service (IRS) as "not a private foundation," normally receives a substantial part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections 509(a)(1) through 509(a)(4).

A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to make grants to other organizations, rather than being disbursed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations, which do not qualify as public charities.

Before donating to a 501(c)(3) organization, a donor may wish to review IRS Publication 78, which lists organizations currently exempt under 501(c)(3).[18] Donors may also verify 501(c)(3) organizations on the web-based, searchable IRS list of charitable organizations[19] as well as on lists maintained by the states, typically on states' Departments of Justice websites. Churches, however, have specific requirements to obtain and maintain tax exempt status; these are outlined in IRS Publication 1828: Tax guide for churches and religious organizations.[20] This guide clearly outlines activities allowed and not allowed by churches under the 501(c)(3) designation. A private, nonprofit organization, GuideStar, also provides reputable and detailed results for web-based searching to verify information on 501(c)(3) organizations.[21]

Consumers may file IRS Form 13909 with documentation to complain about inappropriate or fradulent (i.e., fundraising, political campaigning, lobbying) activities by any 501(c)(3) tax-exempt organization.[22]

Obtaining status

The basic requirement of getting tax exempt status is that the organization is specifically limited in powers to purposes that the IRS classifies as tax exempt purposes. Unlike for-profit corporations that benefit from broad and general purposes, non profit organizations need to be limited in powers to function with tax exempt status, but a non profit corporation is by default not limited in powers until it specifically limits itself in the articles of incorporation and/or nonprofit corporate bylaws. This limiting of the powers is crucial to obtaining tax exempt status with the IRS and then on the state level. You acquire 501(c)(3) tax exemption by filing IRS Form 1023. The form must be accompanied by a $850 filing fee if the yearly gross receipts for the organization are expected to average $10,000 or more.[23][24] If yearly gross receipts are expected to average less than $10,000, the filing fee is reduced to $400.[23][24] There are some classes of organizations that automatically are treated as tax exempt under 501(c)(3), without the need to file Form 1023:

  • Churches, their integrated auxiliaries, and conventions or associations of churches[25]
  • Organizations that are not private foundations and that have gross receipts that normally are not more than $5,000[26]

The IRS also expects to release a software tool called Cyber Assistant, which will assist with preparation of the application for tax exemption, but as of late 2011 the release date is unclear.[27]

Political activity

Section 501(c)(3) organizations are absolutely prohibited from supporting political candidates, and are subject to limits on lobbying. They risk loss of tax exempt status if violated.[28]

Elections

Organizations described in section 501(c)(3) are prohibited from conducting political campaign activities to intervene in elections to public office.[29] The Internal Revenue Service website elaborates upon this prohibition as follows:

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

Certain activities or expenditures may not be prohibited depending on the facts and circumstances. For example, certain voter education activities (including presenting public forums and publishing voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner.

On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another; (b) oppose a candidate in some manner; or (c) have the effect of favoring a candidate or group of candidates, will constitute prohibited participation or intervention.

The Internal Revenue Service provides resources to exempt organizations and the public to help them understand the prohibition. As part of its examination program, the IRS also monitors whether organizations are complying with the prohibition.

Lobbying

In contrast to the absolute prohibition on political campaign interventions by all section 501(c)(3) organizations, public charities (but not private foundations) may conduct a limited amount of lobbying to influence legislation. Although the law states that "No substantial part..." of a public charity's activities can go to lobbying, charities with large budgets may lawfully expend a million dollars (under the "expenditure" test), or more (under the "substantial part" test) per year on lobbying.[30] To clarify the standard of the "substantial part" test, Congress enacted §501 (h) (called the Conable election after its author, Representative Barber Conable). The section establishes limits based on operating budget that a charity can use to determine if it meets the substantial test. This changes the prohibition against direct intervention in partisan contests only for lobbying. The organization is now presumed in compliance with the substantiality test if they work within the limits. The Conable Election requires a charity to file a declaration with the IRS and file a functional distribution of funds spreadsheet with their Form 990. IRS form 5768[31] is required to make the Conable election.

501(c)(4)

See also: Citizens United v. Federal Election Commission

501(c)(4) organizations are generally civic leagues and other corporations operated exclusively for the promotion of social welfare, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood, and with net earnings devoted exclusively to charitable, educational, or recreational purposes.[32] 501(c)(4) organizations may lobby for legislation, and unlike 501(c)(3) organizations they may also participate in political campaigns and elections, as long as its primary activity is the promotion of social welfare.[33] The tax exemption for 501(c)(4) organizations applies to most of their operations, but contributions may be subject to gift tax, and income spent on political activities - generally the advocacy of a particular candidate in an election - is taxable.[34]

Contributions to 501(c)(4) organizations are usually not deductible as charitable contributions for U.S. federal income tax, with a few exceptions.[35] 501(c)(4) organizations are not required to disclose their donors publicly.[36]

The lack of disclosure has led to extensive use of the 501(c)(4) provisions for organizations that are actively involved in lobbying, and has become controversial.[37][38] Critcized as "dark money," spending from these organizations on political TV ads has exceeded spending from Super PACs.[39][40]

501(c)(5)

501(c)(5) organizations include labor, agricultural, and horticultural organizations. Labor unions, county fairs, and flower societies are examples of these types of groups. They share a requirement that benefits may not inure to a specific member but the rules for inurement vary among the three different types of organizations under this segment.[41]

501(c)(6)

501(c)(6) organizations include Business Leagues, Home Builders Association, Chambers of Commerce, Real Estate Boards, etc. such as the U.S. Chamber of Commerce political action committee and the National Football League.

See also

References

  1. ^ IRS, Publication 557 "Tax-Exempt Status For Your Organization", pp. 65-66, (Rev. June 2008), Cat. No 46573C. IRS.gov, Retrieved 1/27/2009.
  2. ^ "IRC 501(c)(2) Title-holding Corporations" (pdf). 1986 EO CPE Text. Internal Revenue Service. 1986. Retrieved July 2, 2012.
  3. ^ New Guidance for IRC 501(c)(29) Qualified Nonprofit Health Insurance Issuers[1]
  4. ^ 26 U.S.C. § 513(f).
  5. ^ E.g., 26 U.S.C. § 6033 and 26 U.S.C. § 6050L.
  6. ^ Internal Revenue Bulletin 23, 1982, exercising 26 U.S.C. § 6033(a)(2)(B).
  7. ^ "Annual Electronic Filing Requirement for Small Exempt Organizations — Form 990-N (e-Postcard)". Irs.gov. Archived from the original on 5 May 2009. Retrieved 2009-05-28. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  8. ^ 26 U.S.C. § 6652 and 26 U.S.C. § 6104.
  9. ^ Exempt Purposes - Internal Revenue Code Section 501(c)(3).
  10. ^ IRS Public ation 557 "Tax-Exempt Status For Your Organization", Page 19, (Rev. June 2008), Cat. No 46573C., Retrieved 2009-03-09.
  11. ^ Hopkins, Bruce R. (2011), The Law of Tax-Exempt Organizations (10 ed.), John Wiley and Sons, p. 879, ISBN 978-0-470-60217-1
  12. ^ Judith S. Ballan, "How To Aid a Foreign Charity Through an 'American Friends of Organization," in Proceedings of the Twenty-Third New York University Conference on Tax Planning.
  13. ^ "Legal Dimensions of International Grantmaking: How a Private Foundation Can Use "Friends of" Organizations". Usig.org. Retrieved 2011-06-07.
  14. ^ "Giving Insights: Meet the expert: Suzanne M. Reisman, Law Offices of Suzanne M. Reisman". Gi.philanthropycapital.org. 2010-03-03. Retrieved 2011-06-07.
  15. ^ Larkin, Richard F.; DiTommaso, Marie (2011), Wiley Not-for-Profit GAAP 2011: Interpretation and Application of Generally Accepted Accounting Principles, John Wiley and Sons, p. Ch.11, ISBN 978-0-470-55445-6
  16. ^ IRS, Publication 557 "Tax-Exempt Status For Your Organization", p. 43, (Rev. June 2008), Cat. No 46573C. IRS.gov, Retrieved 2009-03-09.
  17. ^ IRS, "Life Cycle of a Public Charity/Private Foundation", IRS.gov, Retrieved 2009-03-09.
  18. ^ "Publication 78: Seek confirmation from the IRS of whether a 501(c)(3) exemption is in place". Internal Revenue Service.
  19. ^ "IRS Search for Charities". Internal Revenue Service. Archived from the original on 27 April 2011. Retrieved 2011-04-24. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  20. ^ "Tax guide for churches and religious organizations" (PDF). 26 USC 501(c)(3). Internal Revenue Service. Archived from the original (PDF) on 29 April 2011. Retrieved 2011-04-24. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  21. ^ "Review a Charity". GuideStar. Retrieved 2011-04-24.
  22. ^ "Form 13909: Tax-Exempt Organization Complaint (Referral) Form" (PDF). Internal Revenue Service. Archived from the original (PDF) on 29 April 2011. Retrieved 2011-04-24. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  23. ^ a b IRS Form 1023 (Rev. 6-2006), p. 12.
  24. ^ a b IRS Exempt Organizations Website Retrieved on 2009-09-07.
  25. ^ 26 U.S.C. § 508(c)(1)(A)
  26. ^ 26 U.S.C. § 508(c)(1)(B)
  27. ^ Should You Wait for the Cyber 1023?
  28. ^ Eyes wide shut: The ambiguous "political activity" prohibition and its effects on 501(c)(3) organizations, Houston Business and Tax Journal, by Amelia Elacqua, 2008, page 119 and 141, referenced February 16, 2012
  29. ^ "The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations". Irs.gov. 2012-08-14. Archived from the original on 2 December 2010. Retrieved 2012-09-09. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  30. ^ "Political and Lobbying Activities". Irs.gov. 2009-05-11. Archived from the original on 7 May 2009. Retrieved 2009-05-28. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  31. ^ "Form 5768" (PDF).
  32. ^ See 26 U.S.C. § 501(c)(4)(A).
  33. ^ "Internal Revenue Manual 501(c)(4) Nonprofit Organizations".
  34. ^ "Comparison of 501(c) (3)s, 501(c)(4)s, and political organizations" (PDF). Alliance for Justice. July, 2007. {{cite web}}: Check date values in: |date= (help)
  35. ^ "Donations to Section 501(c)(4) Organizations". 2012-08-14. Retrieved 2012-10-31.
  36. ^ "Political activity of environmental groups and their supporting foundations". U. S. Senate Committee on Environment and Public Works. September 2008. p. 6. Archived from the original on 5 March 2010. Retrieved 2010-03-10. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  37. ^ Adair, Bill (December 11, 2006). "Groups hide behind tax code". St. Petersburg Times.
  38. ^ Luo, Michael; Strom, Stephanie (September 20, 2010). "Donor Names Remain Secret as Rules Shift". The New York Times.
  39. ^ Two Dark Money Groups Outspending All Super PACs Combined - ProPublica
  40. ^ How Some Nonprofit Groups Funnel Dark Money Into Campaigns - ProPublica
  41. ^ IRS inurement guidance
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