What Is a 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 the prevention of cruelty to animals or children, or the development of amateur sports.
In the U.S., qualified charitable organizations are known as 501(c)(3) organizations, referring to the portion of the IRS code that deals with the tax treatment of nonprofits.
- A qualified charitable organization is recognized as tax-exempt in the pursuit of philanthropic, nonprofit, or civic activities.
- Section 501(c)(3) is the specific portion of the U.S. Internal Revenue Code (IRC) and a specific tax category for nonprofit organizations.
- 501(c)(3) organizations are not only tax-exempt, but donations to them may also be tax-deductible for donors.
Understanding Qualified Charitable Organizations
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-free.
Qualified charitable organizations include charities, philanthropic groups, certain religious and educational organizations, 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.
How the IRS Regards Qualified Charitable Organizations
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 individual. 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 no bias shows favoritism for one candidate over another. If the organization breaches 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.