Types of Tax-Exempt Organizations Internal Revenue Service

Kelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist covering small business marketing content. She is a former Google Tech Entrepreneur and she holds an MSc in International Marketing from Edinburgh Napier University.

501(c)(3) organizations play an important role in serving the public good and advancing important causes. However, running a 501(c)(3) organization requires a comprehensive understanding of the requirements and responsibilities that come with tax-exempt status. It is a hallmark of legitimacy and credibility, demonstrating to potential donors, grantors, and the public that the organization has met rigorous requirements to be recognized as a charitable entity. Resource mismanagement is a particular problem with NPOs because the employees are not accountable to anyone who has a direct stake in the organization.

Requirements of a 501(c)( Organization

A private foundation is often referred to as a non-operating foundation, as they typically do not have active programs. They are not required to be publicly supported, so revenue may come from a relatively small number of donors, even single individuals or families. Public charities are what most people recognize as those organizations with active programs. Examples include churches, benevolence organizations, animal welfare agencies, educational organizations, etc. These organizations usually receive a substantial portion of their revenue from the general public or from the government.

The International Federation of Red Cross and Red Crescent Societies provides global humanitarian aid during peacetime, such as assisting refugees. The International Committee of the Red Cross provides humanitarian relief for people who are affected by war or other armed conflicts. People employed by the organization must be paid “reasonable compensation,” which is based on the fair market value that the job function requires.

Do Nonprofits Make Money?

Nonprofit 501(c)(3) organizations may accept both cash and non-cash donations, such as clothing or household goods. To report the donation on a tax return, the donor must receive a written disclosure from the nonprofit. 501(c)(3) organizations must be founded for one of the specific purposes as outlined by the IRS. Understanding what constitutes a tax-exempt nonprofit and its requirements and restrictions is the first step toward turning your idea of establishing your own organization a reality.

NPOs cannot be political, which helps explain why so many of them actively seek a non-partisan tone in their communications. Organizations seeking 501(c)(3) status must state explicitly in their organizing papers that they will not participate in any political campaign on behalf of any candidate or make expenditures for political purposes. There are 501(c) groups that can engage in these activities, but not 501(c)(3) organizations. Learn more about the benefits, limitations and expectations of tax-exempt organizations by attending 10 courses at the online Small to Mid-Size Tax Exempt Organization Workshop.

How to Apply for 501(c)( Status

Nonprofit organizations are sometimes called NPOs or 501(c)(3) organizations based on the section of the tax code that permits them to operate. Most nonprofit organizations are required to file Form 1023 or Form 1023-EZ within 27 months from their date of incorporation to apply for tax-exempt status under Section 501(c)(3). The charitable organization must include its articles of incorporation and provide documents that prove that the organization is only operating for exempt purposes. Being “501(c)(3)” means that a particular nonprofit organization has been approved by the Internal Revenue Service as a tax-exempt, charitable organization. It doesn’t have to be a tax-exempt organization, but if it is, it can deduct donations from individuals and corporations. As mentioned earlier, only the IRS can grant tax-exempt status, which includes different types of nonprofits with different requirements.

• After paying creditors, a nonprofit must give its remaining assets to another exempt organization if it closes.
• Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.
• As mentioned earlier, only the IRS can grant tax-exempt status, which includes different types of nonprofits with different requirements.
• Individuals or companies that donate to 501c3 organizations are able to deduct the contribution on their taxes.

Over the last decade, Alana has served as a business operation, technology, and marketing consultant for countless businesses — from start-ups and mid-sized businesses like Fit Small Business to Fortune 500 tech firms like Adobe. She currently serves as a business consultant, operations manager, and content strategist at Doubting Thomas Research Foundations’ Afghan Liberty Project, 5013c definition a small non-profit organization. When selecting a domain name, NPOs often use .org, or the country code top-level domain of their respective country, or the .edu top-level domain (TLD), to differentiate themselves from more commercial entities, which typically use .com. Tax Information for political parties and campaign committees subject to tax under IRC section 527.

For example, an employee may start a new program without disclosing its complete liabilities. The employee may be rewarded for improving the NPO’s reputation, making other employees happy, and attracting new donors. Liabilities promised on the full faith and credit of the organization but not recorded anywhere constitute accounting fraud. File IRS Form 1023 or 1023-EZ within 27 months to receive tax exemption dating from the date of your incorporation. Your exemption will only be valid from the application’s postmark date if you wait any longer. Many nonprofits that are covered by Section 501(c) of the Internal Revenue Code are 501(c)(3) organizations.

Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Failure to comply with these regulations can result in penalties, loss of tax-exempt status, and damage to the organization’s reputation. Financial management also includes creating a budget that aligns with the organization’s goals and priorities, as well as ensuring that the organization has adequate financial resources to meet its needs. The board of directors is responsible for overseeing the organization’s operations, setting strategic goals and priorities, and ensuring that the organization is fulfilling its mission.