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In order to understand the different sections of 501c you first must know what a 501 c is. The term 501 c is referring to Title 26, Section 501(c) of the United States Internal Revenue Code. This specific section allows for certain types of nonprofit organizations to be exempt from paying some federal taxes, which is why so many organizations pursue the 501 c status. Obtaining any 501 c status requires an application to be filled out and submitted to the IRS. You must also be able to provide the necessary supporting documentation needed to supplement your request. In order to become a tax exempt organization you must be incorporated within your state, just like any other corporation would be.

There are many different types of organizations that are recognized by the IRS under the code 501 c. There are 26 different types of 501 c organizations ranging from 501c1 through 501c28, with no 501c20 or 501c24. Each of these different numbers indicates a different type of organization or an organization with a specific purpose. The most common type of 501 c organizations is the 501c3. 501c3 nonprofit organizations are typically organized for Religious, Educational, Charitable or Scientific purposes. Most nonprofit organizations fall into this category. One additional benefit of having a 501c3 organization is that all donations made to the organization can be written off as a tax deduction for the donor.

Another common type of 501 c organization is the 501c4. These nonprofit organizations are generally civic leagues and other organizations organized and operated exclusively for the promotion of social welfare, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood, and with net earnings devoted exclusively to charitable, educational, or recreational purposes. Unlike 501c3 organizations, 501c4 organizations may lobby for legislation; they may also participate in political campaigns and elections, as long as campaigning is not the organization’s primary purpose. Contributions to 501c4 organizations are not deductible as charitable contributions. 501c4 organizations are not required to disclose their donors publicly. This aspect of the law has led to extensive use of the 501c4 provisions for organizations that are actively involved in lobbying, and has become controversial.

The tax exemption for 501c4 organizations applies to most of their operations, but contributions may be subject to gift tax, and income spent on political activities – generally the advocacy of a particular candidate in an election – is taxable.

Below is a list of the various types of 501 c organizations along with a brief description of the specific purpose of each.

• 501(c)(1) — Corporations Organized Under Act of Congress (including Federal Credit Unions)
• 501(c)(2) — Title Holding Corporation for Exempt Organization
• 501(c)(3) — Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations
• 501(c)(4) — Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
• 501(c)(5) — Labor, Agricultural, and Horticultural Organizations
• 501(c)(6) — Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
• 501(c)(7) — Social and Recreational Clubs
• 501(c)(8) — Fraternal Beneficiary Societies and Associations
• 501(c)(9) — Voluntary Employees Beneficiary Associations
• 501(c)(10) — Domestic Fraternal Societies and Associations
• 501(c)(11) — Teachers’ Retirement Fund Associations
• 501(c)(12) — Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, etc.
• 501(c)(13) — Cemetery Companies
• 501(c)(14) — State-Chartered Credit Unions, Mutual Reserve Funds
• 501(c)(15) — Mutual Insurance Companies or Associations
• 501(c)(16) — Cooperative Organizations to Finance Crop Operations
• 501(c)(17) — Supplemental Unemployment Benefit Trusts
• 501(c)(18) — Employee Funded Pension Trust (created before June 25, 1959)
• 501(c)(19) — Post or Organization of Past or Present Members of the Armed Forces
• 501(c)(21) — Black lung Benefit Trusts
• 501(c)(22) — Withdrawal Liability Payment Fund
• 501(c)(23) — Veterans Organization (created before 1880)
• 501(c)(25) — Title Holding Corporations or Trusts with Multiple Parents
• 501(c)(26) — State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
• 501(c)(27) — State-Sponsored Workers’ Compensation Reinsurance Organization
• 501(c)(28) — National Railroad Retirement Investment Trust

Many of these sections are for very specific activities and as a result are not commonly used. Some such as the 501c20 and 501c24 have been combined with other sections or done away with all together. With each different section come slightly different rules and regulations to be aware of. As always, it is a good idea to learn as much as possible about the specific rules before becoming involved with any type of 501 organizations.

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Fees for Applying for 501c3 Tax Exempt Status are Set Increase!

User fees will increase for all applications for exemption (Forms 1023, 1024, and 1028) postmarked January 3, 2010:

• $400 for organizations whose gross receipts are $10,000 or less annually over a 4-year period
• $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period
• $3,000 for group exemption letters

Last time the IRS increased their fees they received a deluge of applications and had a huge backlog for months. Don’t wait until the last minute to receive your exempt status, get your 501c3 application (Form 1023) in before the holidays to save money and expedite the process. 

Remember, you will face additional hurdles if you apply more than 27 months after the end of the month in which your organization was legally formed.

Benefits of 501c3 Tax Exempt Status

The primary benefits of tax exempt status include:

• Donors can make charitable contributions and receive a tax deduction. Most often donors will refuse to offer funding if they will not receive a tax deduction.
• The organization will be qualified to receive private and public grant money.
• As a tax exempt organization you can save money on lower postage rates on corporate mailings.

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Your dream has become a reality. The cause that is your passion has been transformed into a functional organization. You′ve established a board, clarified your mission, adopted bylaws, incorporated, and achieved 501(c)(3) status from the Internal Revenue Service. After such exhaustive effort has been expended, it would be senseless to allow the organization to lose its exempt status or even become administratively dissolved for failure to uphold administrative compliance. Thus, knowledge is power-organizational administrators must be diligent in educating themselves on all state and federal regulations.

First and foremost, it is important to recognize that almost all forms of regulatory compliance will be difficult without the maintenance of adequate financial records. It is imperative that administrators document all sources of receipts and expenditures. A sufficient donor database is ideal. It is also critical to retain all supporting documents, such as grant applications and awards, sales slips, paid bills, deposit slips, and cancelled checks. This will allow for easy preparation of financial statements, include statements of activities (income statement) and statements of financial position (balance sheet).

A 501(c)(3) organization′s annually mandated filing with the IRS is the form 990. All organizations are now required to file, regardless of revenue; however the version of the form will differ based upon the year′s receipts. The filing is due on the 15th day of the 5th month after the fiscal year end  (For example, if the fiscal year ends December 31, the 990 is due on May 15th), but it may be submitted anytime after the fiscal year end. To remain in full compliance, administrators must be aware of all forms that must be filed, i.e. the 990-T for unrelated business income, and special filing requirements for supporting organizations.

In addition to annual reporting, organizations with paid employees will be faced with additional quarterly filings. Like all employers, charities who pay wages must withhold, deposit, and pay employment taxes, including federal income tax, Social Security, and Medicare. This must be done for each individual paid more than $100 per year and reported on form 941.

In addition to IRS compliance some states, though not all, will require annual state level tax filings. Upon commencement of the activities, you′ll need to be sure to obtain state level sales and income tax exemptions, if they are available in your state. If the organization is not granted state exemption, they must file and pay taxes! In some states, even organizations exempt from state taxes must still file some sort of annual return.

In addition to state tax considerations, each year the organization must file an annual report with their state to remain an active corporation. While these forms typically require a minimal amount of information, failure to file may lead to an administrative dissolution of the organization.

A final state level compliance issue to remain abreast of is concerned with charitable solicitation registration requirements. Such laws have been implemented in most states in an effort to protect consumers, and the statutes require charitable organization to register and become licensed prior to the initiation of any solicitation activities. These registrations typically require annual renewal, and come with stiff penalties for violations. If an organization will solicit in more than one state, a valid registration must be in place in each state where representatives will seek donations.

Possibly most importantly, you must remain aware of what activities may jeopardize your exempt status. The most common offenses that lead to the revocation of a 501(c)(3) are private inurement and political campaign intervention. Private inurement occurs when an insider receives excess benefit from the existence of the organization, either in the form of direct financial gain or in more indirect means such as the provision of business to a for-profit in which an insider has an ownership interest. Excess benefit may also occur in transactions with outsiders, however the benefit in the situation must be substantial. Lobbying activities, or attempts to influence legislation, may be conducted; however these activities must be kept to a minimum.

501(c)(3) nonprofits are also strictly prohibited from undertaking any political campaign intervention. While organizations may provide voter education or a review of the issues supported by all candidates, a public charity may not, directly or indirectly, support or oppose any candidate for political office.

Finally, organizations must be diligent in filing annual returns on a timely basis each year. Not only can the IRS revoke the exempt status of any organization that fails to file returns for more than two years, it also reserves the right to impose penalties upon late filers. While an organization may not owe any taxes, the standard penalty for late filing of the annual information return is $20 per day, up to a maximum of $10,000.

Remaining in compliance after attainment of 501(c)(3) status may seem a daunting task; however with careful attention and cooperation of organizational administrators, public charities can function successfully and fulfill their missions abundantly.