501 c what?
The tax codes, regulations, and jargon surrounding the NPO sector can sound like a foreign language, and frankly, can be overwhelming to someone entering the CSR or NPO space (as a newcomer myself, I can tell you it takes a lot of research). We’ve put together a cheat sheet to help you navigate the world of tax-exempt organizations and the parameters, protocols, and regulations that apply to them.
First, it’s important to make a distinction between tax-exempt organizations and tax-deductible donations. Most tax-exempt organizations fall under 501(c) classification. The number (between 1-28) following 501(c) indicates the nature of the organization (ex: a 501(c)(7) organization is a social or recreational club). Though all 501(c)s are tax exempt, not all allow for tax-deductible donations. For donation purposes, we focus primarily on 501(c)(3) organizations, generally referred to as charitable organizations, which exist to benefit the public. They CANNOT: operate for private interests, be an action organization (which acts to influence legislation or in the interest of political candidates), or benefit the interests of any private stockholder or individual. The IRS goes on to define “charitable” as:
Contributing to one of the following: “relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
Confusion can arise regarding religious organizations, but religious approved organizations are classified under 501(c)(3) codes under the charitable classification of “advancement or religion.” Some also qualify under the classification of “advancement of education.”
Another classification that you may come across in the nonprofit space is 509(a)(3). 509(a)(3) organizations, or supporting organizations, are more of a supporting player providing services, support, and partnership with other charities. The nature of the relationship between a supporting organization and its supported charity will usually determine whether the organization qualifies for tax-exempt status (ie a private organization that provides some means of support to a charity does not qualify as a supporting organization). The supported organization should have a particular investment and interest in the operations of the supporting organization.
Public schools may apply for 501(c)(3) status, but the step is not necessary to receive charitable donations or grants. The IRS generally treats schools and educational organizations as government instrumentalities. It defines educational as:
- Instruction or training of individuals for the purpose of improving or developing capabilities or
- Instruction of the public on subjects useful to individuals and beneficial to the community.
Private schools are subject to different classification and restrictions than public schools. Private schools filing for tax-exempt status most provide the following information:
- The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. (This information also must be projected, so far as may be feasible, for the next academic year.)
- The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards.
- A list of the school’s incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations.
- A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed.
- The public school district and county in which the school is located.
Lastly you may come across 170(c)(1) organizations or government entities. Tax-deductible contributions can be made to these organizations IF they are made exclusively for public purposes.