What Is 501(c)?
The 501(c) is a subsection under the United States Internal Revenue Code (IRC). The subsection relates to nonprofit organizations and tax law; specifically, it identifies which nonprofit organizations are exempt from paying federal income tax. The term 501(c) is often used as shorthand to refer to organizations granted legal status under this subsection.
- Section 501(c) of the Internal Revenue Code designates certain types of organizations as tax-exempt—they pay no federal income tax.
- Common tax-exempt organizations include charities, government entities, advocacy groups, educational and artistic groups, and religious entities.
- The 501(c)(3) organization is probably the most familiar entity.
- Donations to certain qualified tax-exempt organizations may be deductible from a taxpayer's income.
Under subsection 501(c) there are multiple sections that delineate the different types of exempt organizations, according to their purpose and operations.
The most common include:
- 501(c)(1): Any corporation that is organized under an act of Congress that is exempt from federal income tax
- 501(c)(2): Corporations that hold a title of property for exempt organizations
- 501(c)(3): Corporations, funds, or foundations that operate for religious, charitable, scientific, literary, or educational purposes
- 501(c)(4): Nonprofit organizations that promote social welfare
- 501(c)(5): Labor, agricultural, or horticultural associations
- 501(c)(6): Business leagues, chambers of commerce, etc., that are not organized for profit
- 501(c)(7): Recreational organizations
Groups that might fit the designated categories must still apply for classification as 501(c) organizations and meet all of the stipulations required by the IRS. Tax exemption is not automatic, regardless of the nature of the organization.
The 501(c)(3) organization is probably the most familiar tax category outlined in Section 501(c)(3) of the IRC. It covers the sort of nonprofits that people commonly come into contact with, and donate money to (see Special Considerations, below).
In general, there are three types of entities that are eligible for 501(c)(3) status: charitable organizations, churches/religious entities, and private foundations.
Other Types of 501(c) Organizations
The 501(c) designation has expanded over time to encompass more types of organizations.
Other organizations that qualify for listing under this designation include fraternal beneficiary societies that operate under the lodge system and provide for the payment of life, illness, and other benefits for its members and dependents. Teacher's retirement fund associations are included as well, so long as they are local in nature and none of their net earnings grow for the benefit of a private shareholder. Benevolent life insurance associations that are local may also qualify for this designation. Certain mutual cooperative electric and telephone companies could also be classified under 501(c). Nonprofit, co-op health insurers might also qualify.
Cemetery companies that are owned and operated for the exclusive benefit of their members or are not operated for profit could receive this designation. Credit unions that do not have capital stock organized, insurers—aside from life insurance companies—with gross receipts that are less than $600,000 and a variety of trusts for such purposes as providing supplement unemployment benefits and pensions can receive this designation and exemptions if they meet all the underlying criteria.
There are also authorizations for organizations whose membership is made up of current and former members of the armed forces of the United States or their spouses, widows, descendants, and auxiliary units in their support.
Tax-exempt organizations must file certain documents to maintain their status. IRS Publication 557 explains those requirements.
In addition to being tax-exempt themselves, 501(c) organizations offer a tax advantage to others: A portion of donations they receive may be deductible from a taxpayer's adjusted gross income (AGI). Organizations falling under section 501(c)(3)—which are primarily charities and educational or social-welfare-orientated nonprofits—are often qualified to offer this benefit to donors.
In general, an individual who itemizes deductions on their tax return may deduct contributions to most charitable organizations up to 50% (60% for cash contributions) of his or her adjusted gross income computed without regard to net operating loss carrybacks. Individuals generally may deduct charitable contributions to other organizations up to 30% of their adjusted gross income.
A charity or nonprofit must have 501(c)3 status if you plan to deduct your donation to it on your federal tax return. The organization itself can often tell you what sorts of donations are deductible, and to what extent—for example, if you buy a one-year museum membership for $100, $50 might be deductible. The IRS offers an exempt organization database that allows you to check an organization's status.