A 501(c)(3) organization is a nonprofit organization deemed tax-exempt by the IRS. This classification as an official nonprofit helps you accomplish more for your mission with even greater efficiency. Section 501(c)(3) of the U.S. Internal Revenue Code allows qualifying nonprofit or not-for-profit organizations to claim federal tax-exempt status. Administration of Section 501(c)(3) is by the Internal Revenue Service within the Department of the Treasury. The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
Obtaining 501(c)(3) Status
Obtaining 501(c)(3) status is a designation that reserves exemption from federal taxation under Section 501(c)(3) of the US tax code for nonprofit organizations organized and operated exclusively for certain specified charitable purposes. This status provides numerous benefits, including allowing organizations to receive donations that are deductible on donors’ income taxes. This signals to potential benefactors that their gift will be used responsibly and increases fundraising efficiency by featuring charities prominently in search results. Achieving your nonprofit’s 501(c)(3) designation opens up many crucial doors. While there are some common, avoidable mistakes when preparing to apply for a 501(c)(3) determination letter, a little planning will help pave a smoother path.
The IRS 501(c)(3) determination letter is a written notification that informs you that the IRS has either approved or denied your Application for Recognition of Exemption. The receipt of a favorable determination is exciting, as it means your corporation can now enjoy several unique benefits. The most notable advantage is that your organization can now devote more time and attention toward serving the public’s interests and expend more funds on pursuing your mission.
Differences Between Nonprofits and 501(c)(3)
What is the difference between a 501c3 and a nonprofit? A nonprofit provides goods and services to the public and can accept donations and don’t pay income tax. A not-for-profit serves its members and can’t distribute profits, accept donations, or get tax exemption. Nonprofits and not-for-profits can make profits if they follow IRS rules. While nonprofits and 501c3s overlap, they aren’t the same.
501c3 refers to the tax code section granting tax exemption. This eliminates federal tax and makes donations deductible. "Nonprofit" refers to benefiting society, not providing financial benefit. Nonprofits operate under different formats depending on the state.
Transition from 501(c)(6) to 501(c)(3)
Going from 501(c)(6) to 501(c)(3) involves sending an IRS form. Approval enables a smooth transition. However, dissenting members may raise fiduciary duty claims.
Determining 501(c)(3) Status
The IRS 501(c)(3) letter informs if the IRS approved or denied tax exemption. Approval means enjoying unique benefits. A notable advantage is devoting more time and funds towards serving public interests.
Section 501(c)(3) allows federal tax exemption of nonprofits meeting certain requirements. 501(c)(3) is one 501(c) category, but primarily for tax deductible donations. The IRS regulates 501(c)(3) status. Majority of 501(c)(3)s are nonprofit corporations.