501(c)(3) Regulations

Charities follow strict rules to maintain their IRS 501(c)(3) status.Donations image by Rebs O from Fotolia.com

A 501(c)(3) tax-exempt organization, commonly known as a nonprofit corporation, is a charitable endeavor that is not subject to federal taxes and may also be exempt from local or state taxes. A not-for-profit organization must apply for tax-exempt status from the IRS. The letter confirming the nonprofit’s tax-exempt status is evidence of nonprofit status. The organization does not receive a tax-exempt number.

Purpose

The 501(c)(3) organization is required to be operated only for exempt purposes. These include charitable, religious, educational or artistic purposes. Such organizations can promote amateur sports, social welfare, animal protection, civil rights, and preservation or scientific and safety research. A 501(c)(3) cannot be political in nature or attempt to influence legislation or promote political candidates as a significant part of its activities. A 501(c)(3) may offer educational materials to legislators or represent its cause before legislative bodies, but may not do so as a substantial part of its activities.

A 501(c)(3) may, in fact, profit from some of its activities, but any earnings must be used to promote the mission of the organization. Profits from its activities cannot be distributed to board members, staff or shareholders. Income in excess of expenses may be held in reserve or used to build an endowment for the organization. Income may also be invested in new programs or activities that further the mission of the organization.

Donations to a 501(c)(3) organization may be tax-deductible in accordance with IRS code section 170 except for 501(c)(3) organizations whose mission is to perform public safety testing. If a charitable organization’s earnings or activities are shown to directly benefit any individual or private interest that contributes to or has influence over the organization, the IRS may charge an excise tax to individuals or organization managers responsible for such a relationship or transaction.

A 501(c)(3) organization is restricted as to how much of its activities may be political or legislative lobbying. Such activities may not form a “substantial part” of the activities of the charity. Promoting a specific candidate for office is absolutely prohibited, although a charity may promote participation in the electoral process without bias toward a specific candidate. Activities in support of or against specific bills, acts or appointments are considered attempts to influence legislation. This includes contacting legislators or urging citizens to adopt, reject or influence their legislators to adopt or reject legislation. Such activity comes under the “substantial part” calculation. Organizations may conduct educational activities with regard to public policy issues without jeopardizing their tax-exempt status. When calculating whether lobbying forms a substantial part of activities, the IRS considers time devoted by staff and volunteers, expenditures on communication and travel against the organization’s total budget. Organizations that lobby must submit Form 5768 to the IRS each year. The IRS may levy an excise tax for excessive lobbying totaling 25 percent of the excess. If the organization engages in excessive lobbying for 4 years, it may lose its tax-exempt status