Decoding 501(c)(3) "Exempt Purpose"
Is your nonprofit formed with an exempt purpose? If it's not, then the IRS might reject your tax exemption application and you might simply lose the benefits of being a tax exempt nonprofit.
The IRS definition of "exempt purpose" is long and somewhat difficult to read. In a nutshell, your nonprofit needs to show that it is formed to further the purpose of philanthropy.
But where does this all come in to play when filing your nonprofit 501(c)(3) application?
There is a portion of the Form 1023 that calls for a "narrative" of the nonprofit's activities, present and future. Quite often, Form 1023 exemption applications come back to the nonprofit's representative with more questions. And many times, the questions sound something like:
"Explain in greater detail how your organization's activities further an exempt purpose under sec. 501(c)(3)."
Although "exempt purpose" is a deeper legal concept than what can be stated in a blog post, the general idea you need to keep in mind is that your organization's purpose needs to be legit -- the IRS is not clueless.
Imagine a man (real story) who wants to start a website to collect money from people so that he, in turn, can pray for them. Although it does meet the "religious" criterion in the definition of exempt purposes, it's not in furtherance of any religion.
Yet, on the flip side, imagine the true case of a group that held annual religious retreats at an amusement park. The IRS claimed that "recreation" was not an exempt purpose. But, the nonprofit's activities at the amusement park were "exempt" because they included religious sermons, religious bands and informational outlets.
The group was granted IRS tax exempt status because their activities were in furtherance of a religion.
For charitable purposes, the nonprofit should show that their services will benefit a "charitable class." The definition of charitable class would go beyond the scope of this post, but in essence, it really defines a large enough group of beneficiaries, as opposed to a small group of identifiable individuals.
IRS tax exemption recognition is not as easy to get as it sounds. In some cases, it might be a matter of filling out forms. In other situations, there needs to be a strategic thought process and careful planning.
- Tax Law Scoop: Being a Tax Exempt Nonprofit (FindLaw's Free Enterprise)
- Exempt Purposes (IRS)
- Charitable Class (IRS)
- Nonprofit and Tax Exempt Organizations (FindLaw)
- Business Incorporation (provided by Coleman & Chambers LLP)
- Business Formation and Tax Consequences (provided by Thorne & Storey, P.A.)
Was this helpful?
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.