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The Big Misconception About 501c3 Status

Posted by CHARITIESHUB on January 7, 2018

The-Big-Misconception-About-501(c)(3)-Status-CHARITIESHUB.jpgMention the word “charity” and a lot of people immediately conjure up some general ideas but not specifics. There are major differences in the types of different charity organizational structures that exist. CHARITIESHUB shares some insights into one particular example: The big misconception of 501(c)(3) status.

What Exactly Is a 501c3?

Most charitable organizations fall into one of three classifications; either nonprofit, not-for-profit, or non-stock corporations. While all three normally require registration with the specific state they operate in, it is the determination of a federal agency, the Internal Revenue Service, which ultimately views and treats the organization with 501c3 status. There are other misconceptions about charity status, but that is by far the biggest regarding "c3’s." A good primer on tax status determination of nonprofits and not-for-profits is outlined clearly on the Charitynetusa.com webpage.

The technical definition of a "c3" is as follows: To be tax-exempt under this section of the Internal Revenue Service Code, an organization must be organized and operated exclusively for exempt purposes set forth in the code and none of its earnings may inure to any private shareholder or individual. (Inure is a fancy legal term that in plain English means no private shareholder or individual connected with the operation of a 501c3 may receive financial benefit or take financial advantage of that role.) Complete details about the designation may be found on the official website of the Internal Revenue Service’s webpage dealing with the classifications of charitable organizations. And as you might suspect, when dealing with a federal agency like the IRS, there is indeed paperwork to be done.

The Small Business Chronicle boils down the necessary application in a nutshell: States grant the nonprofit status that relieves organizations from paying various state taxes. Unless the organization is a church or has less than $5,000 in annual revenue, a nonprofit must apply to the Internal Revenue Service for federal tax exemption. To request tax exemption and status, the organization submits an application Form 1023—Appplication for Recognition of Exemption Under Section 501c3 of the Internal Revenue Code. That application must substantiate that the nonprofit’s organizing documents meet specific requirements. If it does, the IRS confers the designation and status.

The Earlier the Better

The earlier a nonprofit secures its designation, the better, for many reasons. Individual and corporate donations given to other nonprofits are not necessarily tax deductible. By applying for and receiving 501c3 status, your organization may, in fact, receive those donations with your individual and corporate donors receiving a reduction in taxes as a write-off—a powerfully compelling status compared to other nonprofits.

A second major benefit tied directly to the big misconception about the status and that of other nonprofits is the eligibility of the entity to apply for grants. Most government grant programs and grants from private institutions likewise require this specific designation. As an application prerequisite, without it, your organization doesn’t meet the criteria to apply.

Other distinguishing characteristics between nonprofits and "c3" status nonprofits: As a designated "c3" organization, you may be eligible for discounted postage rates and special mailing privileges for nonprofits and in some instances, discounted advertising rates from media outlets.

While the federal tax exemption status distinguishing "c3’s" from other nonprofits is the BIG misconception about charitable organizations, the National Council on Nonprofits points out there are other smaller misconceptions as well. Among them:

  • Nonprofits can’t earn a profit.
  • Nonprofits don’t have paid staff and are comprised mostly of volunteers.
  • Nonprofits are prohibited from political lobbying. They can in fact lobby, but there are some political candidate lobbying restrictions specific to organizations with the "c3" status. Examples of a few other misconceptions are also outlined on this webpage.

Northeastern University’s Career Development blog has some additional misconceptions about the Nonprofit Sector that makes for interesting reading as well.

Guide to Giving

Topics: 501(c)(3)

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