The term 501(c)(3) is pulled directly from Title 26 of the U.S. Code, referred to as the IRS tax code. These apply to taxes, but there is a specific section dedicated solely to non-profit organizations—which is section 501(c)(3). Any organization that meets the criteria can be exempt from paying federal taxes.
Although it is common to see charitable and religious organizations fall under the 501(c)(3) tax category, private foundations can be eligible as well. Another significant advantage of being a 501(c)(3) organization is that anyone who makes donations to you can deduct them from their annual tax obligations. In addition to contributing to an organization that primarily exists to help others, they will also have an added financial incentive for donating.
Maintaining Tax-Exempt Status
The requirements and stipulations for maintaining your tax-exempt status are robust. This is a common reason for these organizations to seek legal counsel to ensure they are compliant. For instance, a 501(c)(3) organization cannot exist to serve someone's private interests, which also extends out to the shareholders.
Although this is a topic unto itself, charitable organizations cannot do anything that influences legislation or politics, with the exception of lobbying. The amount of lobbying they can partake in can be confusing. The IRS states, “...no organization may qualify for section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation.”
Phrases such as “substantial part” almost demand that these organizations have legal counsel because of how subjective it may appear. Will circulating an internal newsletter that advocates for a political candidate put you at risk of losing tax-exempt status? It could, but your attorney would be in the best position to answer that question definitively. Your lawyer and financial advisors would assist you with some of the most considerable challenges that 501(c)(3) organizations face:
- Notifying the IRS if your mission changes (which is required to maintain your status).
- Ensuring the majority of your income goes to your mission and purpose for being a 501(c)(3) organization.
Our business law attorneys are uniquely equipped to handle a wide range of legal matters that owners, managers, and entrepreneurs face. We assist LLCs, corporations, and not-for-profit, tax-exempt 501(c)(3) organizations to get established, understand the tax consequences, and mitigate liability concerns. Contact Hamilton Law to schedule your free consultation.