501(c)(3) Charitable Organization Primer
There are four reasons for seeking an IRC Section 501(c)(3) exemption. First, and most obviously, IRC Section 501(c)(3) organizations do not pay income taxes. The second reason is that they are not subject to federal unemployment taxes. The third, and primary, reason is that an IRC Section 501(c)(3) exemption becomes a financing device. Under IRC Section 170, the charitable contribution deduction applies mainly to contributions made to IRC Section 501(c)(3) organizations. Thus charitable organizations can solicit funds on the representation that the federal government will ultimately share in the contribution. Moreover, private foundations and granting agencies of the federal government will normally make grants only to charitable organizations. Thus, IRC Section 501(c)(3) exemption is important to organizations requiring such funding. A final reason involves state law. Many, if not most, states exempt an organization from state income, sales, and property taxes if the organization has received an IRC Section 501(c)(3) exemption.
In summary, an IRC Section 501(c)(3) exemption grants a status to the organization allowing it, without further qualification, to solicit funds which allow it to pursue the purposes for which it has been formed.
IRC Section 501(c)(3) Exempt Organization Requirements
To be tax-exempt under IRC Section 501(c)(3) an organization must be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. An organization is organized exclusively for one or more exempt purposes only if its articles of organization (1) limits the purposes of the organization to one or more exempt purposes; and (2) does not expressly empower the organization to engage, in activities which in themselves are not in furtherance of the exempt purposes.
None of the organizations earnings may benefit any private shareholder or individual. In addition, the organization may not have lobbying government as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
Most organizations must file Form 1023 to obtain IRC Section 501(c)(3) status. Once the application is filed, the organization will receive a ruling or determination letter recognizing its exempt status. By establishing its exempt status, potential contributors are assured by the IRS that contributions to the organization will be deductible.