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What is the Difference Between 501(c) and 501(c)3?

Both 501(c) and 501(c)3 nonprofit organizations are exempt from paying federal income tax, but there are some differences in how the IRS treats each type of organization. One of the most significant differences is that donors to 501(c)3 organizations can claim a federal income tax deduction for their donation, while donors to some 501(c) entities can't.

How Does an Organization Become Exempt?

The IRS will not grant organizations nonprofit status simply because it operates for a charitable purpose. Each organization must apply to the IRS and the state to be recognized as a nonprofit and meet specific legal requirements.

If the IRS grants an organization nonprofit status under Section 501(c) or 501(c)3 of the U.S. Tax Code, it is not required to pay tax on income related to its nonprofit purposes. The organization will also be listed in the searchable database the IRS maintains on its website.

What is a 501(c) Organization?

A 501(c) organization has been designated as a nonprofit by the IRS, but that section of the Tax Code includes 28 different exempt entities. Donors may only claim a tax deduction for contributions to some types of nonprofits. For example, Section 501(c)6 provides an exemption for chambers of commerce, real estate boards, and other business organizations. Still, those who donate to a 501(c)6 organization can't claim a tax deduction for their contribution.

Entities organized under 501(c) can generate income from their operations, but if they take in substantially more than they are spending each year, the IRS may revoke its tax-exempt status. As a result, most 501(c) organizations try to spend most of their income on operations.

What is a 501(c)3 Organization?

A 501(c)3 organization is the most common type of 501(c) organization, and the IRS allows donors to deduct most contributions to them. Organizations that have received the 501(c)(3) designation from the IRS are usually either public charities or private foundations established for the following purposes:

  • Charitable
  • Religious
  • Educational
  • Improvement of child welfare
  • Scientific or literary
  • Public safety
  • National or international sports competitions
  • Prevention of animal cruelty

The directors and officers of a 501(c)3 nonprofit may be paid for their work, but the profits earned through its activities can't provide them with a direct financial benefit. Finally, a 501(c)3 organization can't pursue lobbying or other legislative activities as its primary activity.

Need Help With Your 501(c) Or 501(c)3 Organization?

If you are forming or operating a nonprofit and need assistance in determining whether it should organize as a 501(c)3 organization or another type of 501(c) entity, a local attorney can help. An experienced lawyer can assist in deciding how your nonprofit should be structured to benefit both the organization and its donors. Additionally, an attorney can help you file for nonprofit status with the IRS and ensure that it operates in compliance with all relevant rules and regulations.

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