501(c)(3) organization facts for kids
A 501(c)(3) organization is a special kind of group in the United States. It can be a company, a trust, or another type of organization. These groups do not have to pay federal income tax. They are one of many types of nonprofit organizations in the US.
To be a 501(c)(3) group, an organization must work only for certain purposes. These include religious, charitable, scientific, literary, or educational goals. They can also test for public safety, help with national or international amateur sports, or prevent cruelty to children or animals.
People who donate money to most 501(c)(3) groups can often get a tax deduction. This means they pay less in taxes. Because of this, losing 501(c)(3) status can be very bad for a charity. Many big donors and companies only give money to groups with this status.
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Types of 501(c)(3) Groups
There are two main types of 501(c)(3) organizations:
Public Charities
A public charity gets most of its money from the public or the government. This support must come from many different people, not just a few families. The Internal Revenue Service (IRS) identifies these groups as "not a private foundation."
Private Foundations
A private foundation gets most of its money from investments. This money is then given as grants to other organizations. They usually don't run their own charitable programs directly.
How to Become a 501(c)(3)
To become a 501(c)(3) group, an organization must show it only works for tax-exempt purposes. Unlike regular companies, non-profit groups must clearly state their limited goals. This is very important for getting tax-exempt status.
Groups apply for this status by sending IRS Form 1023. As of 2006, there is a fee to apply. It costs $850 if the group expects to make $10,000 or more each year. If they expect less than $10,000, the fee is $400.
Some groups automatically get tax-exempt status without filing Form 1023. These include:
- Churches and their related groups.
- Organizations that are not private foundations and usually make less than $5,000.
The IRS also has a simpler online form, Form 1023-EZ, which started in 2014.
Tax-Deductible Donations
People can get a tax deduction for money they give to a 501(c)(3) organization. This applies if the group works for religious, charitable, scientific, literary, or educational purposes. It also applies if they help with amateur sports or prevent cruelty to children or animals.
However, you cannot get a tax deduction for gifts to groups that only test for public safety. Also, tuition fees paid to a private 501(c)(3) school are not tax-deductible. This is because you are paying for a service, not making a pure donation.
Before donating, you can check the IRS website. They have an online list to see if an organization qualifies for tax-deductible donations. If you think a 501(c)(3) group is doing something wrong, like too much political campaigning, you can report it to the IRS.
Most 501(c)(3) groups must tell the IRS the names of their large donors. But this information is usually not made public. Churches are often an exception to this rule.
How 501(c)(3) Groups are Transparent
All 501(c)(3) organizations must let the public see their application for tax-exemption. This includes their Form 1023 and any other papers they sent to the IRS.
They also must make their yearly tax returns public. These are forms like Form 990. This information must be available for three years after the return was due. However, the names and addresses of donors on Schedule B are usually kept private.
The IRS has an online tool called "Tax Exempt Organization Search." You can use it to find information about specific 501(c)(3) groups. Other private groups like GuideStar and ProPublica's Nonprofit Explorer also provide information. WikiCharities is another non-profit that helps make charities more transparent.
Rules for Political Activity
501(c)(3) organizations are not allowed to support political candidates. This rule, called the Johnson Amendment, started in 1954.
These groups also have limits on lobbying, which means trying to influence laws. If they break these rules, they could lose their tax-exempt status. A group that loses its 501(c)(3) status for political activities cannot get it back.
Political Campaign Activities
501(c)(3) groups are completely forbidden from getting involved in political campaigns. They cannot support or oppose any candidate for public office. This means they cannot give money to campaigns or make public statements for or against a candidate.
Breaking this rule can cause them to lose their tax-exempt status. It can also lead to fines.
However, some activities are allowed if they are fair and non-partisan. For example, voter education or voter registration drives are okay. But these activities must not favor one candidate or political party.
Lobbying Rules
Unlike political campaigns, public charities (but not private foundations) can do a small amount of lobbying. Lobbying means trying to influence laws. The law says that "no substantial part" of a public charity's work can be lobbying.
The IRS has never clearly defined what "substantial part" means. To help, Congress created a special rule called the Conable election. This rule sets clear limits on how much money a charity can spend on lobbying based on its budget. If a charity stays within these limits, it is usually considered to be following the rules.
Working in Other Countries
A 501(c)(3) organization can do some or all of its charitable work outside the United States. They can give money to foreign charitable groups. But the money must be used for charitable purposes and the 501(c)(3) group must control how it is used. Private foundations have extra steps they need to follow.
Tax Deductions for Donors to Foreign Activities
Donations to a 501(c)(3) group are tax-deductible only if the money is for the 501(c)(3) itself. The 501(c)(3) cannot just be a middleman for a foreign charity. The group's leaders should check grant requests from foreign organizations. They must also keep an eye on how the money is used.
If a donor says their money must be used for foreign activities, the donation might not be tax-deductible. This is because it is seen as a gift to the foreign group, not the 501(c)(3). Also, the money given to foreign groups cannot be used to support or oppose political candidates in any country.
Foreign Branches
If a 501(c)(3) group sets up a branch in another country to do charity work, donations to the US group are still tax-deductible. This is true even if the money goes to the foreign branch.
However, if a foreign organization creates a 501(c)(3) group just to raise money for itself, and the US group sends almost all donations to the foreign group, then donations are not tax-deductible.
501(c)(3) vs. 501(c)(4)
There are important differences between 501(c)(3) and 501(c)(4) organizations. These differences are about their goals and tax benefits.
| 501(c)(3) | 501(c)(4) | |
|---|---|---|
| Purpose | These are known as charitable organizations. They work for the public good through religious, educational, scientific, or charitable activities. All their money must go towards their mission. | These are social welfare organizations. They work to improve the community. They can do some charity work, but they can also do more advocacy, lobbying, and political activities for social welfare. |
| Tax Deductions for Donations | Donations to 501(c)(3) groups are usually tax-deductible for donors. This means people and businesses can lower their taxes by donating. | Donations to 501(c)(4) groups are generally not tax-deductible. This is because their work often includes more political or lobbying efforts. |
| Political Activity | 501(c)(3) groups have strict rules about politics. They cannot get involved in political campaigns or support specific candidates. They can do limited, non-partisan educational work. | 501(c)(4) groups have more freedom in political activities. They can lobby and do some political campaign work. However, these activities cannot be their main focus. |
| Financial Reporting | 501(c)(3) groups must share detailed financial information on IRS Form 990. This form is public, which helps keep them accountable. | 501(c)(4) groups also file Form 990. But they have more ways to keep some donor information private. |
The rules for both types of groups can be complicated. It is always best to talk to experts if you have questions.
See also
In Spanish: Organización 501(c)(3) para niños
