If you’ve ever considered starting a nonprofit, you’ve probably heard of 501(c) or 501(c)(3) organizations. While the organizations themselves are often referred to as 501(c)s or 501(c)(3)s, these number and letter combos are actually tax categories within the Internal Revenue Code (IRC).
501(c) and 501(c)(3) organizations are typically nonprofit corporations that have applied for and received federal tax exemption from the Internal Revenue Service (IRS). This article will take you through exactly what these organizations are, what they do, and the differences between them.
What is a 501(c) Organization?
A 501(c) organization is a nonprofit, tax-exempt organization (unless its exemption is denied due to meeting criteria under Section 502 or 503 of the IRC). 501(c) organizations are nonprofits that serve the public and include charities, churches, groups that promote education, art, science, and religion, groups that advocate for the rights of others, fraternities, food banks, health clinics, credit unions, and more.
501(c) organizations are typically exempt from paying federal income taxes. While it can generate income from its operations, if the organization makes too much unrelated business income (UBI), the IRS can revoke its tax exempt status.
So what do you need to do to meet the requirements to be designated a 501(c) organization? Regardless of your organization’s operations, you must apply to be classified as a 501(c) organization and meet the IRS’s requirements to achieve tax-exempt status.
What is a 501(c)(3) Organization?
A 501(c)(3) organization is one of 27 different organization types covered under Section 501 of the IRC. The definition of a 501(c)3) organization is an organization (usually a nonprofit corporation) that is committed to a cause that the IRS recognizes as an “exempt purpose.” Exempt purposes include the following categories:
- Charitable
- Educational
- Fostering national or international amateur sports competitions
- Literary
- Religious
- Scientific
- Preventing cruelty to children or animals
- Testing for public safety
To be designated as a 501(c)(3) organization, no shareholder or individual can benefit from your organization’s earnings, and you can’t make campaign contributions or publicly support or oppose political candidates. While directors and officers of the organization can get paid for their work, they should not receive a direct financial benefit from the organization’s profits.
Common types of 501(c)3) organizations are:
- Charities: Receive money from public and private donors and can include churches, libraries, museums, and private schools.
- Private foundations: Receive money from private donors and use the funding to provide grants to support other organizations.
- Private operating foundations: Receive money from private donors, but also have active programs (as charities do). Spend most of the lesser amount of their adjusted net income or minimum investment return on exempt activities. Include medical research foundations and programs for low-income communities.
501(c)3) organizations often provide services to their communities and raise awareness about their causes through educational campaigns. They may also engage in limited legislative advocacy, but cannot endorse specific political candidates.
Charitable Activities Requirement
A 501(c)(3) must engage in one of the following types of charitable activities for the public good:
- Help the poor, distressed, or underprivileged
- Advance religion, education, or science
- Erect or maintain public buildings, monuments, or works
- Lessen the burdens of the government or neighborhood tensions
- Eliminate prejudice and discrimination
- Defend humans and civil rights
- Combat community deterioration and juvenile delinquency
Donations to 501(c)(3) organizations are generally tax deductible, meaning that donors don’t have to pay taxes on the amount they contribute.
What’s the Difference between 501(c) and 501(c)(3)?
These organizations are similar in that they can both be exempt from paying federal taxes. However, donations to a 501(c)(3) organization are tax-deductible (except for testing for public safety organizations), but that is not necessarily the case for other types of 501(c) organizations.
501(c)(3) organizations can’t campaign for political candidates, while other 501(c) organizations can. An organization must meet specific guidelines set by the IRS concerning the cause it supports and the activities it engages in to meet 501(c)(3) criteria.
501(c) vs 501(c)(3) Comparison
- Donations not necessarily tax-deductible
- Can include political organizations, retirement funds, veterans’ organizations, and credit unions, among other types of groups
- Investment income can be exempt from federal income tax
- Ability to lobby and campaign for political candidates (although organizations may have to pay a proxy tax on funds used for lobbying purposes)
- Donations generally tax-deductible
- Only covers causes that the IRS designates as exempt purposes, such as in the case of charitable, educational, or religious operations
- Private foundations must pay federal income tax on investment income
- Can’t campaign for political candidates
Conclusion
A 501(c) organization encompasses 27 different types of groups, while a 501(c)(3) organization serves specific exempt purposes. Donations to a 501(c)(3) organization are typically tax-deductible, while donations to a 501(c) organization are not.
However, there are other differences to be aware of, notably that certain 501(c) organizations can lobby for political causes and support or oppose candidates, while Congress’s ban on political activity means that 501(c)(3) organizations cannot participate in political campaigns.
FAQs
What are the different types of 501(c)?
There are 27 different types of 501(c) organizations, including:
- 501(c)(1): Tax-exempt organizations formed under an Act of Congress, such as Federal Credit Unions and Federal Reserve Banks
- 501(c)(2): Corporations that hold a property title solely to collect income from the property and then turn over the full amount (minus expenses) to a tax-exempt organization
- 501(c)(3): Nonprofits that serve religious, charitable, or educational purposes, or advocacy groups
- 501(c)(4): Nonprofits that promote social welfare and can engage in political lobbying for their cause
- 501(c)(5), 501(c)(16): Farm and agricultural nonprofits
- 501(c)(6): Business leagues and chambers of commerce that are nonprofits
- 501(c)(7), 501(c)8, 501(c)(10): Social and recreation clubs
