Article 501 (C) (3) is an internal revenue code (IRC) for non-profit organizations which have been approved for tax exemption purposes. The organizations referred to in article 501 (c) (3) of the IRC are commonly called charitable organizations.
Distribution of organizations 501 (c) (3)
The United States Internal Revenue Code (IRC) has incorporated subsection 501c into its tax laws to assess whether a non-profit organization should be exempt from federal income tax. The 501c is most popular for its benefits, which offers tax deductions to donors who contribute to nonprofit organizations. There are 29 forms of 501c organizations, but the most common form is 501 (c) (3) which is reserved for charitable foundations.
Tax exemption targets
A 501 (c) (3) is a charitable organization involved in religious, charitable, educational, literary activities, preventing cruelty to animals and children, encouraging competition in amateur sports (locally and internationally), testing public safety and scientific activities or operations. This list expresses the purpose for which a 501 (c) (3) organization can be approved for tax exemption. In other words, these are the purposes of exemption for the existence of a charitable foundation. The most popular forms of charity are churches, schools, nursing homes, and humanitarian programs such as the Red Cross and the Salvation Army. Following these examples, the existence of a charity program must be to advance religion; providing relief to the poor, sick and disadvantaged; promote education and science; lighten the burden on government; defend human rights; combating juvenile delinquency; etc.
Requirements for 501 (c) (3) Exempt status
To be exempt for tax purposes under the guidelines of the Internal Revenue Service (IRS), a 501 (c) (3) organization must operate exclusively for the purposes of the exemption mentioned above. All profits made by the organization must be used only for the advancement of its charitable cause, and not for the benefit of a private shareholder or an individual. Employees working for a 501 (c) (3) should receive only the fair market value required by the job, without expecting bonuses or compensation. In addition, a charity is required to withhold federal income tax from its employees’ pay checks, even if the organization itself is exempt from paying income tax. Exceptions to the withholding rule apply if the employee earns less than $ 100 in a calendar year or if the organization is a religious institution opposed to the payment of social security and health insurance taxes.
A charity must stay true to its purpose. An organization that has signaled to the IRS that its mission is to send the country’s least advantaged to college must maintain this goal. If it decides to engage in another appeal – say sending relief to displaced families in poverty-stricken countries – the 501 (c) (3) organization must first inform the IRS of its change operations in order not to lose its tax-exempt status.
Maintenance of 501 (c) (3) status
To remain tax exempt, a 501 (c) (3) organization cannot be substantially involved in campaign activity that supports or opposes a political candidate. Charitable contributions made to a non-profit organization cannot be used for political reasons. A charity is not allowed to lobby, except that the expenses are less than a certain amount, depending on the size of the organization. Excise taxes may be applied to lobbying expenses that exceed a certain threshold.
Although some unrelated business income is allowed for a 501 (c) (3) foundation, the tax-exempt charity may not receive substantial income from unrelated business activities. This means that the majority of the company’s efforts must be devoted to its exempt objective as a non-profit organization. Any business not related to the sale of goods or rental goods must be limited.
Tax deductions for charitable donations
501 (c) (3) organizations can be classified into two categories – public charities and private foundations. A public charity is a non-profit organization that receives a substantial portion of its revenues or revenues from the general public or from the government. At least one-third of its revenues must come from donations from the general public (including individuals, corporations, and other non-profit organizations) to remain a public charity by IRS standards.
For tax purposes, a person who makes charitable donations can benefit from certain tax deductions that the IRS provides for donors. These tax deductions can help individuals reduce their taxable income. For example, a person who earns $ 60,000 and donates $ 10,000 to their church in tithes and offerings may be eligible to deduct $ 10,000 from their income. Its effective tax rate would therefore be applied to $ 60,000 – $ 10,000 = $ 50,000, instead of $ 60,000 of taxable income. As a general rule, donations to an organization referred to in article 501 (c) (3) may be tax deductible for an individual up to 50% of their adjusted gross income (AGI). In the example given above, if the individual donates $ 35,000, he can only deduct his taxable income of $ 30,000.
A private foundation receives funds from a few public sources, many of which do not accept donations. Revenues can come from a very small pool of donors, and it is not uncommon for a private foundation to have only one donor. All 501 (c) (3) organizations are automatically classified as private foundations unless they meet IRS standards for what is considered a public charity. A family foundation is an example of a private foundation. Donations to a private foundation can benefit from tax deductions of up to 30% of the donor’s adjusted gross income.
Request for tax exemption
To claim federal tax exemption status under section 501 (c) (3), a non-profit organization must file Form 1023 or 1023-EZ within 27 months from the date of incorporation. The charity must include its memorandum of association and provide documents proving that the charity operates only for exempt purposes.
Not all 501 (c) (3) organizations need to submit Form 1023. Churches and public charities with annual revenues below $ 5,000 are exempt from completing the form, but can still choose to do so to ensure that contributions made to them will be tax deductible.