DEFINITION of Qualified Charitable Organization
A qualified charitable organization is a nonprofit organization that qualifies for tax-exempt status according to the U.S. Treasury. Qualified charitable organizations include those operated exclusively for religious, charitable, scientific, literary or educational purposes, or for the prevention of cruelty to animals or children, or the development of amateur sports.
Nonprofit veterans' organizations, fraternal lodge groups, cemetery and burial companies and certain legal corporations can also qualify. Even federal, state and local governments can be considered qualified charitable organizations if the money donated to them is earmarked for charitable causes.
BREAKING DOWN Qualified Charitable Organization
Only donations that are made to a qualified charitable organization are tax-deductible. Organizations that do not qualify for this status are considered for-profit and are taxed accordingly.
For example, political contributions are not tax-deductible, because political parties are not charitable institutions. On the other hand, contributions to an organization dedicated to building hospitals in third-world countries would likely be a charitable organization, and contributions would be tax deductible.
Qualified charitable organizations differ from strictly tax-exempt organizations, which do not have to be for a charitable purpose yet are not required to pay taxes. However, qualified charitable organizations are also tax-exempt.
How the IRS Regards Qualified Charitable Organizations
In order to receive the status from the IRS, qualified charitable organizations must meet requirements under section 501(c)(3) of the Internal Revenue Code. That means none of the earnings of the organization can go toward any private shareholder or individuals. The organization may not seek to influence legislation as a substantial part of its actions.
The organization also cannot engage in any political campaign activity in favor of or in opposition to candidates. There are also limits on how much lobbying these organizations may do in the legislative and political arenas. This includes not being allowed to participate, directly or indirectly, in political campaigns for candidates for public office. Furthermore, no contributions can be made on behalf of the organization for a political campaign.
Likewise, no statements can be made on behalf of the organization in favor of or in opposition to a political candidate. Programs that promote voter registration and participation in elections are permitted, as long as there is no bias that shows favoritism of one candidate over another. If the organization breeches such rules, they may lose their tax-exempt status.
There are further requirements for qualified charitable organizations. They cannot operate or be formed for the benefit of private interests. If the organization enters into any excess benefit transactions with someone who has significant influence over the organization, they could face excise taxes.