Prior to filing and incorporating a nonprofit organization, it is important to review the Internal Revenue Service (IRS) requirements to ensure qualification for tax-exempt status under Internal Revenue Code (IRC) 501(c). Not doing so could result in a significant waste of time and money and might require that you file again in order to accomplish your organizational goals. This article will help you determine tax-exempt status before filing - it is fourth installment in the "How to Create a Nonprofit Organization / Corporation" series.
The Form of a Tax-Exempt Nonprofit OrganizationIn order for a nonprofit organization’s exemption to be recognized by the IRS, the organization must be organized as a trust, a corporation, or an association.
Tax Exempt Organizational TypesIRS Publication 557 provides a great deal of information about the different types of tax exempt organizations. The Organization Reference Chart in IRS Publication 557 provides a complete list of tax exempt 501(c) organization types and their descriptions:
The IRS website also provides detailed tax information concerning specialty organizations such as those concerning social welfare, agriculture or horticulture, labor groups and trade associations, social clubs, fraternal societies, veterans groups, employee benefits associations and funds, political parties and campaign committees as well as other types of tax exempt organizations.
- 501(c)(1) — Corporations Organized Under Act of Congress (including Federal Credit Unions)
- 501(c)(2) — Title Holding Corporation for Exempt Organization
- 501(c)(3) — Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition or Prevention of Cruelty to Children or Animals Organizations
- 501(c)(4) — Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
- 501(c)(5) — Labor, Agricultural, and Horticultural Organizations
- 501(c)(6) — Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
- 501(c)(7) — Social and Recreational Clubs
- 501(c)(8) — Fraternal Beneficiary Societies and Associations
- 501(c)(9) — Voluntary Employees Beneficiary Associations
- 501(c)(10) — Domestic Fraternal Societies and Associations
- 501(c)(11) — Teachers' Retirement Fund Associations
- 501(c)(12) — Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual / Cooperative Telephone Companies, etc.
- 501(c)(13) — Cemetery Companies
- 501(c)(14) — State-Chartered Credit Unions, Mutual Reserve Funds
- 501(c)(15) — Mutual Insurance Companies or Associations
- 501(c)(16) — Cooperative Organizations to Finance Crop Operations
- 501(c)(17) — Supplemental Unemployment Benefit Trusts
- 501(c)(18) — Employee Funded Pension Trust (created prior to June 25, 1959)
- 501(c)(19) — Post or Organization of Past or Present Members of the Armed Forces
- 501(c)(21) — Black lung Benefit Trusts
- 501(c)(22) — Withdrawal Liability Payment Fund
- 501(c)(23) — Veterans Organization (created prior to 1880)
- 501(c)(25) — Title Holding Corporations or Trusts with Multiple Parents
- 501(c)(26) — State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
- 501(c)(27) — State-Sponsored Workers' Compensation Reinsurance Organization
- 501(c)(28) — National Railroad Retirement Investment Trust
Seven Types of 501(c)(3) Tax Exempt CorporationsThe Internal Revenue Service recognizes seven types of 501(c)(3) tax-exempt corporations, which are deemed to have an “exempt purpose” by the IRS:
The operations of the nonprofit organization must be exclusively for the exempt purposes specified and cannot deviate outside of these boundaries. While some types of political organizations are included, in general, a tax-exempt organization may not comprise of “action organization” or one that substantially and actively lobbies to influence legislation. A tax-exempt nonprofit organization may not participate in any campaign activity that supports or disapproves of political candidates.
- educational organizations and private schools
- charitable organizations
- religious organizations
- scientific organizations
- literary organizations
- amateur athletic organizations
- organizations dedicated to the prevention of cruelty to children or animals
Qualification for 501(c)(3) Tax Exempt Status501(c)(3) corporations are commonly referred to as charitable organizations, which are usually able to accept charitable contributions that are tax deductible to donors. IRS Publication 78 , Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, contains a list of organizations eligible to receive tax-deductible charitable contributions. The IRS website provides assistance with IRS Publication 78.
As would be expected, a 501(c)(3) nonprofit organization must not be organized or operated for the benefit of individual people, shareholders or private interests. If beneficial transactions occur with a person who has a substantial influence over the nonprofit organization, the IRS may impose an excise tax on the person who benefits and upon any manager of the nonprofit organization that confirmed the transaction.
The Tax-Exempt Test for “Charitable Purposes”In order to qualify for tax-status under the “charitable purpose” type under IRC 501(c)(3), all of the following must be met:
An experienced nonprofit law attorney may useful on whether your proposed entity would qualify for charitable purposes and tax-exempt status under IRC 501(c)(3).
- The organization must be a corporation, an unincorporated association, community chest, charitable fund or a foundation. Individual “sole proprietorship” type organizations do not qualify.
- The articles of organization of the entity must specifically limit the purposes of the organization to the exempt purposes in IRC 501(c)(3).
- The articles of organization may not expressly empower the organization to engage substantially in the pursuits of purposes not listed in IRC 501(c)(3).
- The assets of the organization must be permanently dedicated to an exempt purposes – if the corporation should dissolve, the assets would be used for a public purpose, not private distribution.
The next article in this series is "Creating and Filing the Articles of Organization".
- Business, Corporate & Nonprofit Law:
- Formation of a Business
Formation, LLC, Corps How to Obtain Tax-Exempt Status For a Nonprofit Organization
By Michael M. Wechsler |
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