What Is a 501(c)(3)?
Technically to be non-profit under section 501(c)(3), an organization must be organized and operate exclusively for exempt purposes as defined by the IRS code, and none of its earnings may benefit any private shareholder or individual. In this article we'll explore the nonprofit designation in a bit more detail.
There are three terms that businesspeople use interchangeably: 501(c)(3), nonprofit, and tax-exempt. These designations can be combined to describe one organization but, separately, they mean different things, as the short video to the right explains.
A nonprofit is simply a corporation that has been created for nonprofit purposes.
A 501(c)(3) is a nonprofit that has been recognized by the IRS as being tax-exempt because of its charitable programs.
Tax-exemption is the result of a nonprofit organization being recognized by the IRS as organized for any purpose allowable under 501(c)(3) regulations.
501(c)(3) Essentials
Section 501(c)(3) of the United States Internal Revenue Code permits federal tax exemption of nonprofit organizations, like public charities and private foundations.
These nonprofits are regulated by the US Department of the Treasury through the Internal Revenue Service.
Organizations that qualify for 501(c)(3) determination include corporations, trusts, and community chests, but the majority are basic nonprofit corporations.
One key distinction of a 501(c)(3) is the federal income tax deductibility of donations.
Many states allow 501(c)(3) organizations to be exempt from sales tax on purchases, as well as exempt from property taxes.
Nonprofit, bulk rate postage discounts are available from the Post Office to qualifying organizations.
Types of 501(c)(3) Organizations
501(c)(3) organizations are defined by one of three primary categories: public charities, private foundations, and private operating foundations.
Public charities are organizations with active charitable programs. These include churches, ministries, animal welfare agencies, and schools. Most of their revenue comes from public donations or from the government. To remain a public charity, a 501(c)(3) must receive at least 1/3 of its donated revenue from a broad base of public support. In addition, public charities must maintain a governing body that is mostly made up of independent, unrelated individuals.
A non-operating, private foundation doesn’t operate charitable programs directly but provides grants to other nonprofit organizations or to individuals. Their revenue may come from a small group of donors or families.
A private operating foundation maintains active programs similar to a public charity. Most of their earnings must go to charitable programs.
501(c)(3) Rules and Restrictions
501(c)(3) organizations are highly regulated with very strict rules for their activities and their governance.
None of the net earnings of a 501(c)(3) can unfairly benefit any director, officer, or private individual.
All assets of a 501(c)(3) are permanently dedicated to a charitable purpose.
If a 501(c)(3) organization ceases operations, all remaining assets must be distributed for a charitable purpose.
A 501(c)(3) cannot intervene in a political campaign or endorse a candidate for public office.
501(c)(3) compliance requirements exist at both the state and federal levels. Annual filing requirements include a corporate annual report, IRS Form 990, and state charitable solicitations registration and renewal.
How Can A.C.T. Intl Help?
Starting a nonprofit can be complicated. You should be doing the ministry you’re best at - not worrying about paperwork and bookkeeping. A.C.T. comes alongside over 700 Christians artists, speakers, and musicians provide the support their nonprofit needs to do the work they are called to.
We can help get your nonprofit set up, equip you for fundraising, and provide all the back office support, bookkeeping, tax preparation, and more.