501 c What? Understanding Charity Organization Tax Exemptions

Main Takeaways:

• Tax-exempt organizations are generally classified under 501(c), but not all of them permit tax-deductible donations, which are primarily a feature of 501(c)(3) charitable organizations.
• Charitable organizations under 501(c)(3) must serve public interests and cannot operate for private gain, act as action organizations, nor benefit private individuals or shareholders.
• Public schools are considered government entities and don’t need a 501(c)(3) status to accept donations, while private schools must meet specific criteria when applying for tax-exempt status.
• The 509(a)(3) classification pertains to supporting organizations that aid other charities, whereas the 170(c)(1) classification covers government organizations, allowing tax-deductible contributions for public purposes.

As a newcomer to the CSR space, I became quickly overwhelmed by all of the tax codes, regulations, and vocabulary surrounding the NPO sector. They all started to sound like a foreign language to me. Yet after many hours of research, and insights from industry experts, we’ve put together a cheat sheet to help you navigate the world of tax-exempt organizations and the parameters, protocols, and regulations that apply to them.

Tax-Exempt vs. Tax-Deductible

First, it’s important to make a distinction between tax-exempt organizations and tax-deductible donations. Most tax-exempt organizations fall under 501(c) classification.Though all 501(c)s are tax exempt, not all allow for tax-deductible donations. The following number (between 1-28) indicates the nature of the organization which we’ll cover in the following sections.

Charitable Organizations – 501(c)(3)

For donation purposes, we primarily focus on 501(c)(3) organizations, generally referred to as charitable organizations, which exist to benefit the public. To fall under this classification, the organization CANNOT: operate for private interests
be an action organization (which acts to influence legislation or in the interest of political candidates) benefit the interests of any private stockholder or individual.

The IRS goes on to define “charitable” as:

While there has been a dispute regarding various organizations classified under the 501(c)(3) codes, religious organizations have been approved upon the bi-law of “advancement or religion”. Some religious organizations are qualified under the bi-law of “advancement of education,” and remain a tax-exempt organization.

It’s worth mentioning the 509(a)(3) classification which is used to establish the sector of ‘supporting organizations.’ These organizations provide services, support, and partnership with other charities. They are not seen as their own charity, but as an organization that stands alongside one. The nature of this relationship between the ‘supporting organization’ and the charity will determine whether the 509(a)(3) qualifies for tax-exempt status.

Where Schools Fit In

Public schools may apply for 501(c)(3) status, but the step is not necessary to receive charitable donations or grants. The IRS generally treats schools and educational organizations as government instrumentalities. It defines educational as:

Instruction or training of individuals for the purpose of improving or developing capabilities or instruction of the public on subjects useful to individuals and beneficial to the community.

Private schools are subject to different classification and restrictions than public schools. Private schools filing for tax-exempt status must provide the following information:

1. The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. (This information also must be projected, so far as may be feasible, for the next academic year.)

2. The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards.

3. A list of the school’s incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations.

4. A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed.

5. The public school district and county in which the school is located.

Lastly, another common code you may come across is the 170(c)(1) which is the distinction for a government organization or entities. Contributions can be made to these types of organizations that would be considered tax-deductible as long as they are made exclusively for public purposes.