501(c) Definition

What Is 501(c)?

501(c) is a designation beneath the US Inside Income Code (IRC) that confers tax-exempt standing on nonprofit organizations. Particularly, it identifies which nonprofit organizations are exempt from paying federal revenue tax.

The federal government presents this tax break to advertise the presence of organizations that exist purely for the general public good and assist them keep afloat. Widespread tax-exempt organizations embrace charities, authorities entities, advocacy teams, academic and creative teams, and non secular entities. 

Understanding 501(c)

Below subsection 501(c), there are a number of sections that delineate the various kinds of tax-exempt organizations, in response to their objective and operations.

The commonest embrace:

• 501(c)(1): Any company that’s organized beneath an act of Congress that’s exempt from federal revenue tax
• 501(c)(2): Firms that maintain a title of property for exempt organizations
• 501(c)(3): Firms, funds, or foundations that function for non secular, charitable, scientific, literary, or academic functions
• 501(c)(4): Nonprofit organizations that promote social welfare
• 501(c)(5): Labor, agricultural, or horticultural associations
• 501(c)(6): Enterprise leagues, chambers of commerce, and so on., that aren’t organized for revenue
• 501(c)(7): Leisure organizations

501(c)(3) Organizations

The 501(c)(3) group might be probably the most acquainted tax class outlined in Part 501(c)(3) of the IRC. It covers the form of nonprofits that folks generally come into contact with, and donate cash to (see Particular Issues, beneath).

Typically, there are three sorts of entities which can be eligible for 501(c)(3) standing: charitable organizations, church buildings/non secular entities, and personal foundations. 

Different Kinds of 501(c) Organizations

The 501(c) designation has expanded over time to embody extra sorts of organizations.

Different organizations that qualify for itemizing beneath this designation can doubtlessly embrace:

• Fraternal beneficiary societies that function beneath the lodge system and supply for the cost of life, sickness, and different advantages for his or her members and dependents
• Trainer’s retirement fund associations, as long as they’re native in nature and none of their internet earnings develop for the advantage of a personal shareholder
• Benevolent life insurance coverage associations which can be native
• Sure mutual cooperative electrical and phone corporations
• Nonprofit, co-op well being insurers
• Cemetery corporations which can be owned and operated for the unique advantage of their members or are usually not operated for revenue
• Credit score unions that shouldn’t have capital inventory organized
• Insurers—except for life insurance coverage corporations—with gross receipts which can be lower than $600,000
• A wide range of trusts for such functions as offering complement unemployment advantages and pensions
• Organizations whose membership is made up of present and former members of the armed forces of the US or their spouses, widows, descendants, and auxiliary models of their help

Tax-Deductible Donations to 501(c) Organizations

Along with being tax-exempt themselves, 501(c) organizations supply a tax benefit to others: A portion of donations they obtain could also be deductible from a taxpayer’s adjusted gross revenue (AGI). Organizations falling beneath part 501(c)(3)—that are primarily charities and academic or social-welfare-orientated nonprofits—are sometimes certified to supply this profit to donors.

Typically, a person who itemizes deductions on their tax return might deduct contributions to most charitable organizations as much as 50% (60% for money contributions) of their AGI computed with out regard to internet working loss carrybacks. People typically might deduct charitable contributions to different organizations as much as 30% of their AGI.

A charity or nonprofit will need to have 501(c)3 standing in the event you plan to deduct your donation to it in your federal tax return. The group itself can typically let you know which kinds of donations are deductible, and to what extent—for instance, in the event you purchase a one-year museum membership for $100, $50 is perhaps deductible.

The Backside Line

Organizations which can be fashioned strictly to assist the general public and never primarily to make a revenue, as is the case with most companies, are an essential presence in society. The U.S. authorities rewards these entities with a 501(c) designation and tax-exempt standing as a result of they cut back the burden on the state and enhance the lives of the inhabitants.

We aren’t simply speaking about charities right here, both. The IRS acknowledges dozens of various kinds of nonprofit organizations as 501(c)s, together with some credit score unions and insurers.