Which 501 (c) are You?

To be a charity or not to be a charity? That is our question.

The IRS regulates revenue from individuals and other entities in the United States. This gives them the authority to also oversee which entities are exempt from taxes. Most Americans probably think there are only two kinds of organizations, taxed and tax-exempt. Well, it’s more complicated than that.

Section 501 of the code governing tax-exempt organizations lays out many types of 501 (c) organizations. You might be surprised at the variety. See the chart from the IRS below.

Publication 557

When most people think of charitable organizations, they think of 501(c)(3) nonprofits. These are the kind that are not only tax-exempt (they don’t pay federal income tax on revenue), but donations to these entities are tax-deductible.

So when individuals or companies make donations to 501(c)(3) organizations, those donations can reduce their tax liability.

When the IRS was first getting into the business of designating nonprofit organizations, the main organizations being created were private family foundations. Even to this day, when you try to start a nonprofit organization, the IRS assumes you are starting a private foundation unless you specifically tell them you are creating a public charity (the kind that receive donations instead of making them).

Charities that apply and receive a 501(3) designation from the IRS must abide by certain rules. They must file annual 990 tax forms (with a few exceptions) and they must limit their lobbying and avoid electioneering. They should avoid conflicts of interest and they should not receive too much money from one family over a 5 year period (called the “public support test”).

Essentially the IRS thinks lobbying and electioneering (partisan election work) is not proper for c3 organizations. They also don’t want one family controlling a public charity. If they do control that charity, the IRS wants them to be chartered as a private foundation, which has extra rules.

Check out the chart above and learn a bit more about the different kinds of federally tax-exempt organizations.