Tax Exemption Requirements for Charities & Non-profits
By Internal Revenue Service
www.CNSNews.com
Information Services
June 03, 2003
(Editor's Note: The following is a list of requirements necessary for an
organization to receive Section 501(c)(3) status from the Internal Revenue
Service)
Charities & Non-Profits
Exemption Requirements
To be tax-exempt as an organization described in IRC Section 501(c)(3) of the
Code, an organization must be organized and operated exclusively for one or more
of the purposes set forth in IRC Section 501(c)(3), and none of the earnings of
the organization may inure to any private shareholder or individual. In
addition, it may not attempt to influence legislation as a substantial part of
its activities, and it may not participate at all in campaign activity for or
against political candidates.
The organizations described in IRC Section 501(c)(3) are commonly referred to
under the general heading of "charitable organizations." Organizations described
in IRC Section 501(c)(3), other than testing for public safety organizations,
are eligible to receive tax-deductible contributions in accordance with IRC
Section 170.
The exempt purposes set forth in IRC Section 501(c)(3) are charitable,
religious, educational, scientific, literary, testing for public safety,
fostering national or international amateur sports competition and the
prevention of cruelty to children or animals. The term charitable is used in its
generally accepted legal sense and includes relief of the poor, the distressed
or the underprivileged; advancement of religion; advancement of education or
science; erection or maintenance of public buildings, monuments or works;
lessening the burdens of government; lessening of neighborhood tensions;
elimination of prejudice and discrimination; defense of human and civil rights
secured by law; and combating community deterioration and juvenile delinquency.
To be organized exclusively for a charitable purpose, the organization must be a
corporation, community chest, fund or foundation. A charitable trust is a fund
or foundation and will qualify. However, an individual or a partnership will not
qualify. The articles of organization must limit the organization's purposes to
one or more of the exempt purposes set forth in IRC Section 501(c)(3) and must
not expressly empower it to engage, other than as an insubstantial part of its
activities, in activities that are not in furtherance of one or more of those
purposes. This requirement may be met if the purposes stated in the articles of
organization are limited in some way by reference to IRC Section 501(c)(3). In
addition, assets of an organization must be permanently dedicated to an exempt
purpose. This means that should an organization dissolve, its assets must be
distributed for an exempt purpose described in this chapter or to the federal
government or to a state or local government for a public purpose. To establish
that an organization's assets will be permanently dedicated to an exempt
purpose, the articles of organization should contain a provision ensuring their
distribution for an exempt purpose in the event of dissolution. Although
reliance may be placed upon state law to establish permanent dedication of
assets for exempt purposes, an organization's application can be processed by
the IRS more rapidly if its
articles of organization include a provision ensuring permanent dedication of
assets for exempt purposes. For examples of provisions that meet these
requirements, download Publication 557, Tax-Exempt Status for Your Organization.
An organization will be regarded as "operated exclusively" for one or more
exempt purposes only if it engages primarily in activities which accomplish one
or more of the exempt purposes specified in IRC Section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its
activities is not in furtherance of an exempt purpose. For more information
concerning types of charitable organizations and their activities, download
Publication 557.
The organization must not be organized or operated for the benefit of private
interests, such as the creator or the creator's family, shareholders of the
organization, other designated individuals or persons controlled directly or
indirectly by such private interests. No part of the net earnings of an IRC
Section 501(c)(3) organization may inure to the benefit of any private
shareholder or individual. A private shareholder or individual is a person
having a personal and private interest in the activities of the organization. If
the organization engages in an excess benefit transaction with a person having
substantial influence over the organization, an excise tax may be imposed on the
person and any managers agreeing to the transaction.
An IRC Section 501(c)(3) organization may not engage in carrying on propaganda,
or otherwise attempting, to influence legislation as a substantial part of its
activities. Whether an organization has attempted to influence legislation as a
substantial part of its activities is determined based upon all relevant facts
and circumstances. However, most IRC Section 501(c)(3) organizations may use
Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3)
Organization to Make Expenditures to Influence Legislation, to make an election
under IRC Section 501(h) to be subject to an objectively measured expenditure
test with respect to lobbying activities rather than the less precise
"substantial activity" test. Electing organizations are subject to tax on
lobbying activities that exceed a specified percentage of their exempt function
expenditures. For further information regarding lobbying activities by
charities, download Lobbying Issues.
For purposes of IRC Section 501(c)(3), legislative activities and political
activities are two different things and are subject to two different sets of
rules. The latter is an absolute bar. An IRC Section 501(c)(3) organization may
not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to) any
candidate for public office. Whether an organization is engaging in prohibited
political campaign activity depends upon all the facts and circumstances in each
case. For example, organizations may sponsor debates or forums to educate
voters. But if the forum or debate shows a preference for or against a certain
candidate, it becomes a prohibited activity. The motivation of an organization
is not relevant in determining whether the political campaign prohibition has
been violated. Activities that encourage people to vote for or against a
particular candidate, even on the basis of non-partisan criteria, violate the
political campaign prohibition of IRC Section 501(c)(3). See the FY-2002 CPE
topic entitled Election Year Issues for further information regarding political
activities of charities.
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