Giving 501(c)(3) Charitable Organizations Basics

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Giving Tuesday was created as a vehicle to channel all of the good will and spending from the holiday season into charitable organizations.  A charitable organization are usually tax-exempt organizations under section 501(c)(3) of the Internal Revenue Code, and, thus called 501(c)(3)’s.  Organizations that are accepted by the IRS to be tax exempt under section 501(c)(3) are generally eligible to receive tax-deductible contributions creating the win-win situation of the organization getting money and the  donor getting a tax write-off.

If you are looking to confirm that an organization is tax exempt, you can do so here.  Sites like Charity Navigator can provide even more information regarding how an entity uses their money.  If you are looking to become a tax exempt organization, keep on reading to learn some basics.

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3).  The exempt purposes set forth are:

  • charitable,
  • religious,
  • educational,
  • scientific,
  • literary,
  • testing for public safety,
  • fostering national or international amateur sports competition, and
  • preventing cruelty to children or animals.

The term “charitable” is broad but not unlimited.  It used in its generally accepted legal sense and, according to the IRS, includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

The articles of organization or incorporation of the entity must expressly limit the organization’s purposes to one or more of those exempt purposes and must not expressly empower it to engage in activities that do not further one or more of those purposes, although insubstantial parts of its activities may not be exempt.  In addition, none of its earnings may inure to any private shareholder or individual.  To prove that the requirement that the limitation must be in the Articles, the IRS is clear that the requirement is not satisfied if the limit is contained only in the bylaws or other rules or regulations, statements of your organization’s officers or that your actual operations are for exempt purposes.  It has to be in the Articles from the very beginning.

In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.  In other words, no lobbying or campaigning allowed.

Assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for another organization that has a similar exempt purpose described in this chapter, or to the federal government or to a state or local government for a public purpose.  No distribution to members or officers upon dissolution is allowed.

In order to make sure that an entity meets its standards, the IRS makes charitable organizations submit an application called Form 1023 (or its baby brother Form 1023 EZ) and a Form 990 each year showing that all of the requirements are met.

Want more information, the IRS provides more here.  But the bottom line is, if you want to collect donations that donors can then write off on their taxes, make sure you are meeting the 501(c)(3) requirements.  And if you want to write off your donations, make sure the organization is meeting them, too.

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