Understand 501(c) Nonprofits For 2023

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Many nonprofits are eligible to become exempt from federal income taxes. To attain exemption, a nonprofit must register with the IRS to be considered a 501(c) charitable organization as detailed in US Code Title 26, section 501(c)(3). To do so, a nonprofit cannot distribute earnings for the profit of stockholders or individuals.

501(c)(3) organizations are tax exempt nonprofits, as approved by the Internal Revenue Service. Donors which contribute funds to 501(c)(3) organizations are able to deduct their donations from income taxes. Examples of 501(c)(3) organizations include churches, charities, societies for artistic appreciation, educational advancement organizations, advocates for disadvantaged individuals, protection of animals, and social groups.

The IRS recognizes two types of 501(c)(3) nonprofits: public charities and private foundations. Organization classification depends on levels of public assistance. Public charities receive most funds from the general public and in turn use those funds for the betterment of the public. Private foundations receive most funds from endowments and investments and distribute those funds in the form of grants made to other organizations. Churches and religious organizations have a specific set of requirements in order to meet tax exempt status, as detailed in IRS Publication 1828.

501(c)(3) organizations can take part in political lobbying, but face restrictions on frequency of activity. If a nonprofit’s primary objective is lobbying at the local, state, or federal level, the organization can no longer be tax exempt. If a nonprofit attempts to persuade members of legislature to create or support legislation, or if the nonprofit advocates pieces of legislation, the organization loses tax exempt status. Organizations cannot run political campaigns. However, organizations may advocate areas of interest not tied to pieces of legislation and educate the public about areas of interest and retain tax exempt status.

501(c)(4) organizations are tax exempt nonprofits dedicated to social welfare. Activities include advocating civic issues or societal improvements. 501(c)(4) organizations must have social welfare as the primary focus. Organizations which serve only the interests of a select few members do not qualify for 501(c)(4) status.

As with 501(c)(3) organizations, there are restrictions on the lobbying efforts of 501(c)(4) organizations. 501(c)(4)’s cannot spend more than 50% of funds on political lobbying or influence. However, within this monetary limit, organizations have limited restrictions. 501(c)(4)’s do not have to disclose their donors. However, those donors cannot deduct any of their contributions. Large corporations and labor unions are able to register for tax exemption and spend unlimited funds to lobby and attempt to influence political decision making.

501(c)(5)’s are tax exempt nonprofit organizations in the areas of agriculture, horticulture, and labor. The primary group within this area is labor unions. 501(c)(5)’s can participate in unlimited amounts of lobbying, as long as it is in an area related to the organization and can contribute to political campaigns as long as it is not the primary function.

501(c)(6)’s are tax exempt nonprofit organizations intended to advance business in various industries. Examples include chambers of commerce, business leagues, real estate boards, boards of trade, and professional football leagues. 501(c)(6)’s can participate in unlimited amounts of lobbying, as long as it is in an area related to the organization and can contribute to political campaigns as long as it is not the primary function of that organization.

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