Nonprofit Tax Exemptions

There are 29 different types of organizations that are tax exempt under Section 501(c) of the Internal Revenue Code. These can include entities like credit unions, civic leagues, and chambers of commerce. Identifying your desired 501(c) federal tax exemption prior to forming your nonprofit corporation is essential so that you can ensure the appropriate language is included in your articles of incorporation and other formation documents.

The most popular and widely known of the 501(c) exemptions is the 501(c)(3). 501(c)(3) organizations are commonly referred to as charitable organizations and are frequently eligible to receive tax deductible contributions, often a key factor in choosing to pursue federal tax exemption and a valuable benefit to offer donors to your nonprofit organization. The IRS does impose some restrictions on 501(c)(3) nonprofit organizations.

• 501(c)(3) organizations may not be organized for the benefit of private interests, such as the founder, the founder’s family, or others directly or indirectly controlled by such private interests.
• 501(c)(3) organizations must be organized and operated for the specific exempt purposes identified in Section 501(c)(3) of the Internal Revenue Code.
• 501(c)(3) organizations may not participate in electioneering, campaign activity for or against political candidates.

The IRS further classifies exempt charitable organizations into either public charities or private foundations. This classification is determined by the generation of revenue and activities conducted in support of the organization’s exempt purposes.

• Public charities “are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities, (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities.” - IRS Website
• Private foundations “typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.” - IRS Website
• Private operating foundations are a hybrid where a private foundation offers direct program services.

Key Takeaways:

1. There are more than 25 different types of Section 501(c) exemptions.
2. 501(c)(3) organizations are classified as either public charities or private foundations.
3. 501(c)(3) organizations are frequently eligible to receive tax deductible contributions, a valuable benefit for donors to your nonprofit organization.