What Is 501(c)?
501(c) is a designation under the United States Internal Revenue Code (IRC) that confers tax-exempt status on nonprofit organizations. Specifically, it identifies which nonprofit organizations are exempt from paying federal income tax.
The government offers this tax break to promote the presence of organizations that exist purely for the public good and help them stay afloat. Common tax-exempt organizations include charities, government entities, advocacy groups, educational and artistic groups, and religious entities.
- 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.
Watch Now: What Is a 501(c) Organization?
Under subsection 501(c), there are multiple sections that delineate the different types of tax-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 can potentially include:
- Fraternal beneficiary societies that operate under the lodge system and provide for the payment of life, illness, and other benefits for their members and dependents
- Teacher's retirement fund associations, 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
- Certain mutual cooperative electric and telephone companies
- Nonprofit, co-op health insurers
- Cemetery companies that are owned and operated for the exclusive benefit of their members or are not operated for profit
- Credit unions that do not have capital stock organized
- Insurers—aside from life insurance companies—with gross receipts that are less than $600,000
- A variety of trusts for such purposes as providing supplement unemployment benefits and pensions
- 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, as explained in IRS Publication 557.
Tax-Deductible Donations to 501(c) Organizations
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 their AGI computed without regard to net operating loss carrybacks. Individuals generally may deduct charitable contributions to other organizations up to 30% of their AGI.
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 which 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.
What Is the Meaning of 501(c) Organization?
If an organization is labeled 501(c), it means it is a nonprofit organization concerned with providing a public benefit and is exempt from paying federal income taxes. The 501(c) designation encompasses many types of organizations, including charities, government entities, advocacy groups, educational and artistic groups, and religious entities.
What Is the Difference Between a 501(c) and a 501(c)(3)?
501(c) and 501(c)(3) are two different tax categories in the Internal Revenue Code. Both are nonprofit organizations exempt from federal income tax. However, a 501(c)(3)—which consists of charitable organizations, churches/religious entities, and private foundations—can also tell its donors that they can deduct their contributions on their tax returns.
What Are the Types of Nonprofits?
The IRS has issued a long list of the type of nonprofit organizations that can qualify for 501(c) status. Common examples include charitable organizations, churches and religious organizations, social advocacy groups, and trade organizations.
The Bottom Line
Organizations that are formed strictly to help the public and not primarily to make a profit, as is the case with most businesses, are an important presence in society. The U.S. government rewards these entities with a 501(c) designation and tax-exempt status because they reduce the burden on the state and improve the lives of the population.
We aren’t just talking about charities here, either. The IRS recognizes dozens of different types of nonprofit organizations as 501(c)s, including some credit unions and insurers.