What is a Nonprofit?

A nonprofit organization is a legally incorporated entity. Nonprofit organizations include but are not limited to such groups as churches, neighborhood centers, art galleries, symphonies, zoos and social programs. Nonprofit organizations represent a vast array of resources that make our communities safe and enjoyable places to live. They create a structure for society to deliver essential community services, volunteer opportunities and provide life-enhancing options.

As a starting point in deciding where to make your charitable gifts, you will want to make sure that the recipients of your gifts have tax-exempt status from the Internal Revenue Service, so that you may claim the appropriate federal tax deduction for your gift.

Organizations that solicit contributions and memberships generally fall into one of the following four tax exempt categories: 503(c)(3), 501(c)(4), 501(c)(6), and 501(c)(19). These numbers correspond to the sections of the Internal Revenue Code that describe the specific types of organization.

501(c)(3)
To obtain a 501(c)(3) tax exempt status, most nonprofit organizations must file documents with the IRS that prove them to be operating for certain charitable purposes specified by statute. (Older charities may have a 101(6) ruling, which corresponds to section 501(c)(3) of the current Internal Revenue Code.) Churches and some small charities with less than $5,000 annual income do not have to apply to the IRS for recognition of exemption.

Organizations that fall under the 501(c)(3) category include groups whose purpose are:

Charitable
Religious
Educational
Scientific
Literary
Preventing cruelty to children or animals
Fostering national or international amateur sports competition
Testing for public safety

Contributions to all 501(c)(3) organizations except those that “test for public safety” are deductible as charitable donations for federal income tax purposes.

The three principal classifications of 501(c)(3) organizations are:

1. A public charity (identified in IRS terms as “not a private foundation”) that normally receives a substantial part of its income , directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the IRS code under sections 509(a)(4).
   
2. A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to make grants to other organizations rather than being disbursed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations that do not qualify as public charities.
   
3. A private operating foundation is a private foundation that devotes most of its earnings and assets directly to the conduct of its tax-exempt purposes, rather than making grants to other organizations for these purposes. Private operating foundations are defined in the IRS Code under section 4942(j)(3).

Tax Exempt Doesn’t Always Mean Tax Deductible

When an organization states “We are tax exempt”, that does not necessarily mean that contributions are tax deductible. “Tax exempt” means the organization does not have to pay taxes. “Tax deductible” means the donor can deduct contributions to the organization on his or her federal income tax return. The Internal Revenue Service defines more than 20 different categories of tax exempt organizations, but contributions to only a few of these categories are also tax deductible. Principal among “tax deductible” groups is the 501(c)(3) category, broadly termed “charitable” organizations.

To obtain tax exempt status under Section 501(c)(3), an organization has to file documents with the Internal Revenue Service that prove it to be organized and operated for the charitable purposes specified by the Internal Revenue Code. The IRS looks at these documents only in terms of the code, it does not “approve” specific charities or judge other aspects of the charity’s efficiency. Organizations receiving 501(c)(3) status are those that the IRS has considered charitable, educational, religious, scientific, or literary, those that prevent cruelty to children and animals; and those that foster national or international amateur sports competitions.

When the IRS rules positively on an application, contributions to the organization are tax deductible as charitable donations for federal income tax purposes. The group receives a “Letter of Determination” formally notifying it of its status. A copy of this letter should be available from the organization as verification of its tax-exempt status.

Individuals giving to public charities, private operating foundations or certain private foundations may deduct contributions representing up to 50% of adjusted gross income if the donor itemizes. Individuals giving to 501(c)(3) organizations that are private foundations may generally deduct contributions representing up to 30% of their adjusted gross income.

Corporations may deduct all contributions to 501(c)(3) organizations (regardless of foundation status) to an amount normally equal to 10% of their taxable income.

Generally, contributions to organizations tax exempt under sections (501(c)(4), 501(c)(6) and other sections of the Internal Revenue Code are not deductible as charitable donations, but might be deductible as business expenses.