Defining What is a 501c3

What is a 501c3?

Let’s dive in and start with some answers: What is a 501c3? A 501(c)(3) tax-exempt organization is any nonprofit corporation organized by one or more individuals (and not private foundations). Which nonprofit corporations qualify? All nonprofits that are organized and operated exclusively for religious, charitable, scientific, and educational purposes, or to foster national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment), or for the prevention of cruelty to children or animals.

Or they must be an organization that is run by a community chest, united fund drive, cooperative campaign, federated campaign committee, or local movement to finance public libraries. What are some examples? Churches & Synagogues Public Schools Public Universities Museums Community Gardens Non-Profit Hospitals Prisons Local Neighborhood Associations How do I know if my nonprofit qualifies as a 501(c)(3) tax-exempt organization?

The law requires all nonprofits that file federal taxes (with the IRS) to have 501(c)(3) tax-exempt status. Therefore, this means if your nonprofit is required to file federal taxes, it must have 501(c)(3) tax-exempt status. But remember…just because an organization has a 501(c)(3) designation it does not mean that the organization is eligible for grants and/or donations from outside sources. This will be discussed in detail later on.

The answer above seems simple enough but there are a lot of moving parts involved here so let’s dive deeper into each part of the question listed above: what are some examples of these organizations? A neighborhood association – what would otherwise be considered to be nothing more than an unincorporated group without 501(c)(3) protections could become something way bigger and more powerful if it were incorporated as a 501(c)(3) tax-exempt organization.

For example, a neighborhood association can utilize its 501(c)(3) status to apply for grants from outside sources and to become eligible for foundation funding that would have otherwise not been available. Let’s dive into an example: You live in the suburbs of Detroit, Michigan and you want your local park to be updated with new benches, handrails, and plantings because these updates will make your park something that is useful/intriguing/thought-provoking for families who visit the area? But there isn’t much money in your town’s budget or city grant program to support any type of construction like this at one single location…but what if you could leverage your neighborhood’s 501(c)(3) tax-exempt status with a foundation? A foundation may be willing to help support this construction under one condition…. the work must be done at multiple locations throughout the state.

The reality is that most foundations have various funding priorities when they allocate money for local projects and/or programs – it’s just the nature of the beast. But if an organization can prove that their work will positively affect more than one community, then foundations and other outside sources are more likely to contribute funds because the expenditure results in a greater positive impact on society as a whole.

This example illustrates how important it is for organizations of all sizes to have 501(c)(3) tax-exempt status so that they can maximize their funding options. If the local park’s 501(c)(3) organization is able to raise enough money from outside sources, then they can apply for a grant from another foundation and have enough funds to execute their plan without tapping into any local tax revenue or other funding sources that could be used by other projects/programs within the community.

Why are foundations willing to fund 501(c)(3) organizations?

Remember…this type of financial support would not be available if it weren’t for the organization’s 501(c)(3) status – this means that one very important aspect of why 501(c)(3) organizations are attractive to foundations is because donors receive a federal tax deduction when they make their donation. This makes it even more advantageous for a foundation to make this type of donation instead of just giving the money directly to the organization. In other words, foundations are able to leverage their dollars and stretch them even further by donating to an organization that is eligible for federal tax benefit status.

What else can my 501(c)(3) tax-exempt organization do with its status?  Another example involves a historical museum in your town that has struggled for years because it does not have access to local funding or grants from outside sources. The finances have gotten so bad that they may be forced to close their doors due to a lack of operating funds. The reality is that there aren’t many options left unless they can find another way and fast! One option could be for the museum’s board members to form a new 501(c)(3) tax-exempt organization and then merge their old museum into the new one.

The reasons to do this include having better access to local, state, or federal grants, tapping into donors that give through foundations, and converting their historical building (that has been costing them thousands of dollars each month in overhead expenses like utilities, insurance, and maintenance) into something that generates revenue on its own. Let’s use an example of how this could work: The current board member team at the historical museum decides to form a new 501(c)(3) nonprofit organization by filing Articles of Incorporation with the Secretary of State’s office and they both agree that all original assets/inventory from the old organization will be transferred over to the new organization.

This ensures continuity and allows the new 501(c)(3) nonprofit to start with a clean financial slate. The old museum’s board members also agree that the only way they can continue this historical legacy in the community is by starting a completely separate nonprofit – so they decide that their mission will stay exactly the same, but their operating structure will improve dramatically…and it does.

Once this merger takes place, both original organizations dissolve and then become “dormant” …which means these boards won’t be able to do anything until/unless someone revives them at a later time. That said, no one is required to revive them – meaning any future board members or an entirely different group of people could possibly resuscitate both organizations if they wanted to and it could mean the continuation of both legacies.

The best part about this concept is that now the new 501(c)(3) organization can tap into pledged funds from benefactors who are interested in keeping this historical museum alive…and even more exciting, they can apply for grants from a variety of foundations and other funding sources because they have tax-exempt status. This means that all money that is donated goes directly toward the preservation of history …which is something we appreciate as taxpayers who routinely give our hard-earned money to Uncle Sam each year!

What does a 501(c)(3) organization look like? 

Most registered nonprofit organizations will be designated as either a 501(c)(3), 509(a)(1), or another specific tax category. This status is displayed at the top of their Form 990-N, which is a short form that an organization files with the IRS if it had gross receipts under $50,000 or total assets valued below $250,000. Here is what your organization’s designation might look like:

Once they have a 501(c)(3) tax-exempt status, they can seek foundation grants and apply for other types of funding (see where to find grant opportunities) so that donations will go directly toward their historic preservation efforts. The old board members would then be able to step down because this new organization is now permanently structured in such a way that it will continue to exist into the future even after they are gone …which means a rich legacy stays in your town or city for generations to come.

If you have any questions about forming a 501(c)(3) tax-exempt organization, feel free to contact us at any time and we’ll be happy to explain how this process works, provide you with a simple step-by-step guide, and send you our sample nonprofit incorporation forms so you can get started immediately! If you have additional questions about how to start a 501(c)(3) organization please feel free to contact us .)

What is the process of filing for 501(C)(3) status? 

If you want to use Form 1023, then this form must be filed with the IRS. It’s also possible that your state will require a different form or procedure if it has its own state income tax statute (ex: CA – Exempt Organization Business Income Tax Return). Red tape aside, applying for approval as a 501(C)(3) organization simply requires filing Form 1023 with the IRS, but this form must be supported by a mountain of documentation and oversight. For example, you will need your articles of incorporation, which describes the organizational structure, important terms that define how you operate (i.e., when board elections happen), and your mission statement to prove that your organization is organized for exclusively exempt purposes like public good or charity (you can use sample nonprofit forms for guidance).

Providing proof that you are organized exclusively for one of these exempt purposes requires you to include mission statements from board members, donors, beneficiaries, etc., as well as details about how the money raised by the organization will go directly toward operating expenses or charitable functions. Additionally, if there is more than one class of stock in a corporation then you may also have to file Form 851 with the IRS. This form is used to provide proof that a corporation is not controlled by private inurement and that all corporate profits are dedicated for public good purposes.

The process of forming a 501(c)(3) organization can be long, but it has been streamlined so you have access to detailed instructions. First, decide how you want to structure your nonprofit and what type of board you want — this last part is important because unnecessary complications can arise if there’s no clear leadership; therefore, make sure everyone knows who’s in charge before they start making decisions.

Then, find out what state requirements are necessary before applying for federal tax-exempt status (ex: Form 1023 must be filed with the IRS). Finally, don’t forget to check with your state and local tax authorities before you file anything with the IRS (because some states have their own income taxes like CA). After you get approval from the IRS, it’s possible that state or national requirements will be necessary (ex: a separate application form for your state), but your case will be different depending on how you’re organized.

What is an example of a 501(c)(3) organization?  

For-profit corporations are given tax benefits because they offer goods or services in exchange for financial compensation — if their primary purpose is to provide charitable help for communities then they can apply for 501(c)(3) status. However, it’s important to note that not all nonprofits are registered as 501(c)(3) organizations, but there are many different types of nonprofits that focus on a variety of purposes. For example, charitable trusts and endowments like the Bill & Melinda Gates Foundation are organized to pursue philanthropic goals (like public good) while foundations run by governments such as the John F. Kennedy Center for Performing Arts is organized to offer artistic enrichment to American communities; both of these qualify as 501(c)(3) organizations.

How do you file for 501(C)(3) status? 

Before you start filling out forms with the IRS, make sure your organization has all its internal processes in order because applicants have a limited time after receiving approved recognition from the IRS to change their internal rules or by-laws if necessary. Complete the 501(c)(3) application process by filling out Form 1023 and supporting documentation, which includes verified copies of your articles of incorporation (which should include a mission statement), information about directors, and financial accounting documents.

The IRS will then review the application to make sure that all required information was provided, so be sure to provide detailed descriptions without leaving anything out — if they request additional information at any point during this part of the process you have up to 180 days to respond or else risk losing approval for tax-exempt status.

If the IRS approves your application for tax-exempt status, an organization recognized as a 501(C)(3) organization can begin accepting donations from donors that qualify under Internal Revenue Service regulations.

Make sure to keep 501(c)(3) organizations separate from other organizations that are set up specifically for fundraising purposes. For example, a separate fund-raising organization can be created to raise money for research or provide education on a certain disease without jeopardizing the tax status of the original 501(c)(3) charitable organization.

What are some examples of tax-deductible donations?

There are many varying definitions for what qualifies as a tax-deductible donation, but the most common example is any contribution that goes directly towards running your organization. For instance, you can’t deduct the value of new clothing or other goods donated to Goodwill, but if you purchase tickets to a Broadway show and then donate them to a 501(c)(3) nonprofit performing arts group like Stagebridge, the performance is part of your charitable mission so it’s eligible as a tax-deductible donation (as long as there weren’t other purchases involved).

What else is considered charitable giving? Donations made in exchange for items, discounts on products or services, or contributions made by companies that receive free publicity or other perks are also considered charitable donations for the purposes of a 501(c)(3) organization — but only if they are separate from any revenue-generating activity.

What happens if I file an application?

If you complete and submit a Form 1023, the IRS grants your application automatic recognition by default and starts applying automatic revocation rules. An organization recognized as a 501(c)(3) organization can begin accepting tax-deductible donations from donors that qualify under Internal Revenue Service regulations. Once this automatic recognition is granted, an official determination letter will be sent confirming whether or not your nonprofit has been approved for tax-exempt status within 120 days of filing; however, organizations that apply must be prepared to respond.

Conclusion

In conclusion, 501(c)(3) organizations are beneficial for both donors and non-donors because they are able to leverage funds from foundations. Nonprofit organizations have become more efficient at managing their operating costs so donations can go directly toward perpetuating the mission of the nonprofit — this ultimately benefits all involved, . . .including you!