Section 501(c)(3) is just one of the tax law provisions granting exemption from the federal income tax to non-profit organizations. This exemption does not cover other federal taxes such as employment taxes.
501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
Another provision, 26 U.S.C. § 170, provides a deduction, for federal income tax purposes, for some donors who make charitable contributions to most types of 501(c)(3) organizations, among others. Regulations specify which such deductions must be verifiable in order to be allowed (e.g., receipts for donations over $250).
The three principal classifications of 501(c)(3) organizations are as follows:
- A public charity (identified in IRS terms as "not a private foundation") normally receives a substantial part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections 509(a)(1) through 509(a)(4).
- A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to make grants to other organizations, rather than being disbursed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations which do not qualify as public charities.
- A private operating foundation is a private foundation that devotes most of its earnings and assets directly to the conduct of its tax exempt purposes, rather than to making grants to other organizations for these purposes. Private operating foundations are defined in the Internal Revenue Code under section 4942(j)(3).
Under IRC Section 170, individuals giving to 501(c)(3) organizations that are either public charities, private operating foundations, and certain private foundations may deduct contributions representing up to 50% of the donor's adjusted gross income if the individual itemizes on his tax returns. Individuals giving to 501(c)(3) organizations that are private foundations may generally deduct contributions representing up to 30% of their adjusted gross income. Corporations may deduct all contributions to 501(c)(3) organizations (regardless of foundation status) up to an amount normally equal to 10% of their taxable income.
501(c)(3) status for charities and the related section 170 deduction for donors are important to many charitable groups. Some individuals and groups (and virtually all foundations) will not give to a charity if it does not have 501(c)(3) status. Therefore, loss of this status can be harmful to a charity's existence.
Some organizations automatically acquire 501(c)(3) status upon filing of proper organic documents (e.g., articles of incorporation as a church), at least until annual income exceeds a statutory threshold. Others will not receive 501(c)(3) status until they file an application and supporting documentation to the IRS and have a certification letter issued. The IRS will examine the application and may request further financial and organization information prior to granting the 501(c)(3) status. To cover donations made before the letter is issued, the regulations require prompt filing of the application after organization, or after an existing organization satisfies the criteria for 501(c)(3), or after exceeding the income threshold. Contrarily, any organization may instantaneously lose its status for tax-deductible donations if it violates the pertinent regulations.