organization – a 501(c)(4) – or a for-profit business.
Identifying nonprofits by their numbers
Nonprofit organizations can be formed under the IRS code for many reasons other than charitable ones. To give you a taste of the variety of these organizations, the following list summarizes various classes of nonprofit organizations:
❯❯ 501(c)(3): These organizations are formed for educational, scientific, literary, charitable, or religious pursuits and also to test for public safety and to prevent cruelty to children and animals. Nonprofits in this category may be classified as public charities or private foundations; the source of support for the organization usually determines the classification. Foundations are subject to additional rules and reporting requirements. This book focuses on 501(c)(3) organizations that are classified as public charities. Contributions to these organizations are tax deductible for their donors. Public charities may engage in limited lobbying. More information about lobbying can be found in the following section.
❯❯ 501(c)(4): These organizations are known as social-welfare organizations because they’re formed for the improvement of general welfare and the common good of the people. Advocacy groups tend to fall into this category because organizations with this classification are allowed more leeway to lobby legislators as a part of their mission to improve the general welfare. Contributions to these organizations aren’t deductible for the donor.
❯❯ 501(c)(5): Labor unions and agriculture and horticulture organizations formed to improve conditions for workers are in this category. These groups also may lobby for legislation.
❯❯ 501(c)(6): Business and trade associations that provide services to their members and work toward the betterment of business conditions are placed in this classification. This category includes chambers of commerce and real estate boards, for example. Again, lobbying for legislation is allowed.
❯❯ 501(c)(7): This section covers social clubs formed for recreation and pleasure. Country clubs and organizations formed around a hobby come under this classification. These organizations must be funded primarily by memberships and dues.
❯❯ 501(c)(9): This type of nonprofit is an employees’ beneficiary association that’s created to pay insurance benefits to members and their dependents. It must be voluntary, members must have a common bond through employment or a labor union, and in most cases, it must meet nondiscrimination requirements.
Several other 501(c) – type organizations are so specialized in nature that we won’t go into them here. One of our favorites is the 501(c)(13), which covers cemetery companies.
Political action committees (PACs) and parties have their own special classification, too. They’re recognized under IRS code section 527 and are organized for the purpose of electing persons to office. They have special reporting requirements and aren’t required to be incorporated. Donations to these organizations are not tax-deductible and the names of their donors must be disclosed.
Rules and regulations to add to your file
Entire volumes have been written about IRS regulations and laws pertaining to nonprofits. But don’t worry – we just want to give you an overview of some facts that may help you decide whether starting a 501(c)(3) nonprofit organization is your best choice.
Nonprofits and political activities
Nonprofits can’t campaign to support or oppose the candidacy of anyone running for an elected office. However, the stipulations on lobbying for specific legislation are less clear. In the following list, we break down the rules so you know what you can and can’t do, depending on what type of nonprofit you set up:
❯❯ Social-welfare organizations and labor unions: These organizations have more leeway when it comes to legislative lobbying than 501(c)(3) organizations do. They can engage in political intervention activity as long as it is not their primary activity. Groups that lobby must inform their members what percentage of dues they use for lobbying activities, and they can’t work toward a candidate’s election.
❯❯ Charitable organizations, or nonprofits that the IRS considers public charities under section 501(c)(3): These nonprofits may participate in some legislative lobbying if it isn’t a “substantial” part of their activities. The IRS doesn’t define the term substantial, so it determines this question on a case-by-case basis. These nonprofits can generally spend a higher portion of their budgets on lobbying activities if the organization chooses to elect the h designation (IRS Form 5768), which refers to section 501(h) of the IRS code. The IRS allows more expenditures for direct lobbying (when members of the nonprofit talk with a legislator about an issue at hand) than for grassroots lobbying (encouraging members of the general public to contact legislators to promote an opinion about a piece of legislation).
❯❯ Private foundations: Although they, too, are recognized under section 501(c)(3), these organizations may not participate in any legislative lobbying. The only exception to this rule is when pending legislation may have an impact on the foundation’s existence, tax-exempt status, powers, duties, or the deductibility of its contributions.
The situation with churches
Churches are in a category all by themselves. The IRS doesn’t require them to file for a tax exemption, nor does it require them to file annual reports to the IRS. Some churches, however, do apply for an exemption because their social-service programs often include anything from preschools to soup kitchens. These programs seek 501(c)(3) status so they can more easily apply for foundation funding and government grants or contracts to help pay the costs of providing the services.
Taxes, taxes, taxes
Nonprofit organizations may be subject to unrelated business income tax, also known as UBIT. When a nonprofit makes $1,000 a year or more in gross income from a trade or business that’s regularly carried on and that’s unrelated to its exempt purpose, this income is taxable. In addition, some corporate sponsorship funds may be subject to UBIT if they’re perceived by the IRS as advertising dollars. IRS Publication 598 tells you all you need to know about this subject; visit www.irs.gov
