The Ins And Outs Of The 501(c)(3)
February 11, 2016 Lynette Garet Business Basics 0 Comment
Maybe Not Everything You Need to Know About the 501(c)(3), but Here are the Basics….
Nonprofit charitable organizations provide untold benefits to their communities, and to the world at large. They encourage generosity, help the needy and underserved, and bring attention to causes and problems that would otherwise go unseen and unresolved. Federal and state governments recognize the value of these organizations, and encourage their development and growth by offering them incentives in the form of tax breaks. To get these tax benefits, organizations must apply for a special tax status – most often a 501(c)(3).
The term 501(c)(3) refers to an IRS tax code that provides federal tax exemption status for non-profits. Generally speaking, tax exemptions for charitable organizations mean that they do not have to pay income taxes. There are some characteristics that are specific to a 501(c)(3) status, including tax-deductible donations, exemption from sales and property tax, and state tax exemptions. It should be noted that different states have different 501(c)(3) exemption allowances.
501(c)(3) nonprofits may perform a wide variety of services, from helping the poor, to ensuring the welfare of animals, to promoting the arts and sciences. They fall into three distinct categories: public charities, private non-operating foundations, and private operating foundations. Public charities receive a hefty portion of their funding/revenue from the public at large, including individuals, corporations, other charities, and/or the government.
Private foundations, both operating and non-operating, are nonprofits that obtain funding from specific sources, such as a single wealthy donor, a small number of corporations, or family money. They do not typically take donations, but they do take endowments. Private foundations invest their principle funding and give all of the returns on their investments to charity. A private operating foundation distributes its revenue to its own charitable interests, while a private non-operating foundation gives its revenue to other charitable organizations.
501(c)(3) status is issued and regulated by the Department of Treasury through the IRS, and is given only when organizations prove that they adhere to a strict set of rules and regulations. None of a non-profit’s revenue can be used to unfairly benefit any of its officers or directors, political lobbying activity is limited, and any endorsement of political candidates is prohibited.
To obtain a 501(c)(3), eligible organizations need to file Form 1023 or 1023-EZ. After an intensive review, the IRS will determine whether or not to grant the status.
The 501(c)(3) review period can take anywhere from 2 to 12 months, with some reviews taking longer, and some taking less time. In some very specific cases, such as provision of relief from a natural disaster, the review process can be expedited.
The main reason for such a lengthy review time is a backlog of applications. In periods of low demand, applications can take as few as 30 days to reach a reviewer’s desk. However, during periods of high demand, they can take as long as eight months.
Once 501(c)(3) status has been approved, the organization will have to remain in compliance with all regulations at all times. Directors must keep careful records of all financial activities, all donors, and all other information relevant to preserving their tax-exempt status.