What is 501(c)?
501(c) is a designation in the United States Internal recipe code (IRC) which confers tax-exempt status on non-profit organizations. Specifically, it identifies nonprofits that are exempt from paying federal income tax.
The government is providing this tax relief to encourage the presence of organizations that exist solely for the public good and to help them stay afloat. Common tax-exempt organizations include charities, government entities, advocacy groups, educational and arts groups, and religious entities.
Key points to remember
- Section 501(c) of the Internal Revenue Code designates certain types of organizations as tax-exempt – they pay no federal income tax.
- Common tax-exempt organizations include charities, government entities, advocacy groups, educational and arts groups, and religious entities.
- The 501(c)(3) organization is probably the most familiar entity.
- Donations to certain qualifying tax-exempt organizations may be deductible from a taxpayer’s income.
Watch now: What is a 501(c) organization?
Under Section 501(c), several sections define the different types of tax-exempt organizations, depending on their purpose and operations.
The most common include:
- 501(c)(1): Any company incorporated under a law Congress which is exempt from federal income tax
- 501(c)(2): Companies who hold a title deed for exempt organizations
- 501(c)(3): Corporations, funds or foundations that operate for religious, charitable, scientific, literary or educational purposes
- 501(c)(4): Nonprofit organizations that promote social welfare
- 501(c)(5): Labour, Agricultural, or Horticultural Associations
- 501(c)(6): Commercial Leagues, Chamber of Commerceetc., which are not organized for profit
- 501(c)(7): Recreational Organizations
Groups that may fit the designated categories must still apply for classification as 501(c) organizations and meet all IRS required stipulations. Tax exemption is not automatic, regardless of the nature of the organization.
The 501(c)(3) organization is probably the most familiar tax category described in section 501(c)(3) of the IRC. It covers the type of nonprofit organizations that people typically come into contact with and donate money to (see Special Considerations, below).
In general, there are three types of entities eligible for 501(c)(3) status: charitable organizations, churches/religious entities, and private foundations.
Other Types of 501(c) Organizations
The 501(c) designation has expanded over time to encompass more types of organizations.
Other organizations eligible for listing under this designation may potentially include:
- Beneficiary fraternal societies that operate under the lodge system and provide payment of living, sickness, and other benefits for their members and dependents
- Teachers’ pension fund associations, as long as they are local in nature and none of their net profits accrue to the benefit of a private shareholder
- Local voluntary life insurance associations
- Certain cooperative electricity and telephone mutuals
- Non-profit cooperative health insurers
- Cemetery businesses that are owned and operated for the exclusive benefit of their members or not operated for profit
- credit unions who do not have organized social capital
- Insurers, excluding life insurance companies, with gross receipts less than $600,000
- A variety of trusts for purposes such as the payment of unemployment benefits and supplementary pensions
- Organizations whose membership consists of former and current members of the United States Armed Forces or their spouses, widows, descendants, and auxiliary units in their support
Tax-exempt organizations must file certain documents to maintain their status, as explained in IRS Publication 557.
Tax-deductible donations to 501(c) organizations
In addition to being tax-exempt themselves, 501(c) organizations offer a tax advantage to others: a portion of the donations they receive may be deductible from the taxpayer’s income. adjusted gross income (AGI). Section 501(c)(3) organizations—which are primarily charities and nonprofits focused on education or social welfare—often qualify to provide this benefit to donors.
In general, a person who details deductions on their tax return can deduct contributions to most charities up to 50% (60% for cash contributions) of their calculated AGI without considering net operations loss carrybacks. Individuals can generally deduct charitable contributions to other organizations up to 30% of their AGI.
A charity or nonprofit must have 501(c)3 status if you plan to claim your donation on your federal tax return. The organization itself can often tell you what types of donations are deductible and to what extent, for example, if you purchase a one-year museum membership for $100, $50 might be deductible.
What is the meaning of the 501(c) organization?
If an organization is labeled 501(c), it means it is a nonprofit organization concerned with providing a public benefit and is exempt from paying federal income tax. The 501(c) designation encompasses many types of organizations, including charities, government entities, advocacy groups, educational and arts groups, and religious entities.
What is the difference between a 501(c) and a 501(c)(3)?
501(c) and 501(c)(3) are two different tax categories in the Internal Revenue Code. Both are nonprofit organizations exempt from federal income tax. However, a 501(c)(3) – which includes charities, churches/religious entities, and private foundations – may also tell its donors that they can deduct their contributions on their tax returns.
What are the types of non-profit associations?
The IRS has published a long list of the types of nonprofits that qualify for 501(c) status. Common examples include charities, churches and religious organizations, social advocacy groups, and commercial organizations.
Organizations that are formed strictly to help the public and not primarily to make a profit, as is the case with most businesses, are an important presence in society. The US government rewards these entities with a 501(c) designation and tax-exempt status because they reduce the burden on the state and improve people’s lives.
We’re not just talking about charities here either. The IRS recognizes dozens of different types of nonprofit organizations as 501(c), including some credit unions and insurers.