Section 501 c 3 of Internal Revenue Code of US allows tax exemption to certain nonprofit organizations that are set up as public charities, private foundations or private operating foundations.US Department of Treasury regulates all three types of 501(c) organizations,through the Internal Revenue Service.
Tax benefits to 501 c 3 organization get ?
- Section 501(c)(3) organizations are fully tax exempt from federal tax.
- The donations to non-profit organization is fully tax deductible in hand of donors against the federal tax liability.
- Like federal tax deduction granted to donation to 501(c)(3) organization , most states also allow for tax deductibility .
- Many states allow 501(c)(3) organizations to be exempt from sales tax on purchases, as well as exemption from property taxes.
- Special nonprofit, bulk rate postage discounts are available from the Post Office to qualifying organizations.
What are the types of 501(c)(3) Organizations
These types of organizations fall into one of three different types of 501 c organizations :
- public charities,
- private foundations, and
- private operating foundations.
A public charity receives a substantial portion of its revenue from the general public or from government. Common example of public charities are churches, benevolence organizations, animal welfare agencies, educational organizations, etc. A 501(c)(3) organization must obtain at least 1/3 of its donated revenue from a fairly broad base of public support if it desires to keep the status as public charity. In addition, public charities must maintain a governing body that is mostly made up of unrelated individuals.
Donations to public charities can be tax deductible
- 50% of the donor’s income in case of individual donor.
- 10% in case of Corporate limits .
As the name suggest, a private foundation is often aided by a relatively small number of donors. A family foundation is an example of a private foundation.Private foundations support the work of public charities through grants, though that is not always the case. Individual donor gets 30% of his/her income as tax deduction for donations to private foundations .
Private Operating Foundation
Private operating foundations are hybrids of public charity and private foundation. This type of Section 501(c)(3) are very uncommon.Most of the earnings must go to the conduct of programs and tax deduction for donors are equivalent to that of public charity .
Restrictions on Activities
501(c)(3) organizations are highly regulated entities.
- No part of the activities or the net earnings can unfairly benefit any director, officer, or any private individual,
- No officer or private individual can share in the distribution of any of the corporate assets in the event the organization shuts down.
- Lobbying, propaganda or other legislative activity must be kept relatively insubstantial.
- Intervention in political campaigns or the endorsement/anti-endorsement of candidates for public office is strictly prohibited.
How to start a 501 c 3 ?
For that an entity must apply to the IRS for recognition as 501(c)(3) by filing the Form 1023 (or Form 1023-EZ), –Application for Recognition of Tax Exemption.
Who can apply for being recognized as section 501(c)(3) organization ?
Entities that can seek 501(c)(3) determination from the IRS include corporations, trusts, community chests, unincorporated associations and some types of LLCs .Under the 501c3 application process, the IRS will thoroughly examine the structure, governance and programs of the organization before an order to grant 501(c)(3) status is passed.