In the U.S. Internal Revenue Code, section 501(c)(3) defines a specific type of organization that is granted tax-exempt status. To qualify under this section, an organization must be both organized and operated exclusively for purposes that are considered exempt. These exempt purposes are explicitly outlined in section 501(c)(3) and include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or the prevention of cruelty to children or animals. A critical condition is that no part of the organization’s earnings can benefit any private shareholder or individual. Furthermore, these organizations must not be action organizations, meaning they cannot substantially engage in political lobbying or participate in political campaigns.
Organizations that meet the criteria of section 501(c)(3) are widely known as charitable organizations. A significant benefit for these organizations, excluding those testing for public safety, is their eligibility to receive contributions that are tax-deductible for donors, as per Code section 170. This ability to offer tax deductions is a key factor in attracting donations and supporting their operations.
It is imperative that a 501(c)(3) organization is not formed or operated for the benefit of private interests. This principle extends to ensuring that no portion of the organization’s net earnings inappropriately benefits any individual or private shareholder. If a 501(c)(3) organization engages in what is termed an excess benefit transaction with someone who holds substantial influence over the organization, both the individual involved and any organizational managers who agreed to the transaction may be subject to excise taxes. These regulations are in place to ensure the organizations operate for public benefit rather than private gain.
Additionally, there are specific restrictions on the extent to which 501(c)(3) organizations can engage in political and legislative activities, commonly known as lobbying. For a detailed understanding of these limitations, resources such as the IRS’s guidance on Political and Lobbying Activities and publications like “Lobbying Issues” and “Election Year Issues” provide further information. These resources clarify the boundaries and expectations for 501(c)(3) organizations regarding their involvement in political matters.
To gain a deeper understanding of the advantages, limitations, and responsibilities associated with tax-exempt organizations, the IRS offers interactive training through the Small to Mid-Size Tax Exempt Organization Workshop. This workshop provides valuable insights for those involved in or looking to establish a 501(c)(3) organization.
