What does 501(c)(3) mean? Individual donors hear the words, “501(c)(3)” a lot. A number of radio commercials requesting donations include “501(c)(3)” in the radio ad. You should know not all nonprofits are 501(c)(3). Nonprofit is a legal status of an organization. Nonprofit is a status usually assigned by the state of the corporation, depending on the paperwork filed with the state. The most beneficial nonprofits to donate to are nonprofits with a 501(c)(3) exempt status. But what do you get when you’re a 501(c)(3) organization and how do you become one?
The benefit of becoming a 501(c)(3) organization is tax-exempt status. In simple terms, a 501(c)(3) is exempt from paying federal income-tax and other taxes. By avoiding payment on federal taxes, the nonprofit keeps more of the capital received from donations or other methods of receipts.
How do you obtain tax-exempt status? According to the IRS “To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”
How do donors benefit? Donations to 501(c)(3) organizations are tax deductible. Generally, up to 50 percent of a donor’s adjusted gross income is deductible. A donor deduction can be 30% or lower depending on the code and type of tax organization. You can view a donor’s deduction limits on the IRS’s website, https://www.irs.gov/charities-non-profits/exempt-organizations-select-check-deductibility-status-codes
But achieving 501(c)(3) status is just the start. If your charity solicits donations, you may have to comply with state guidelines. Many states require charities, soliciting donations, to apply to a charitable trust bureau or similar agency. If you solicit donations in multiple states, you may be required to apply in each state you are soliciting.