Federal taxes are a significant expense for many businesses, but not for exempt non-profits. Non-profit charities that are organized under Internal Revenue Code Section 501(c)(3) are generally tax-exempt, and their donors usually get tax breaks for supporting them. The IRS divides these charities into two categories: public charities and private foundations.
General Restrictions on 501(c)(3) Organizations
Organizations that claim tax-exempt status under Internal Revenue Code Section 501(c)(3) must comply with certain IRS requirements. A tax-exempt entity must be organized and operated exclusively for a purpose recognized by the IRS. In addition, none of the entity's earnings may benefit a private shareholder, whether that shareholder is an individual or another entity. Other provisions of the tax code apply to political groups, so the IRS restricts the political activities of charitable 501(c)(3) organizations. A 501(c)(3) charitable organization that campaigns for a political candidate or tries to influence legislation risks losing its tax-exempt status.
Tax-Exempt Public Charities
Public charities are one type of tax-exempt groups covered by Section 501(c)(3) of the tax code. Examples of this type of organization include churches, hospitals and certain medical research facilities. Public charities receive funding from a variety of sources, or they may generate income from activities related to the purpose they support. Some public charities are exempt because they support other public charities. A church is automatically exempt from the time of its formation, but other charities must register with the IRS to obtain tax-exempt status.
How the IRS Defines Charities
The IRS defines "charity" broadly. The term encompasses non-profit activities such as serving the poor, eliminating discrimination, fighting community deterioration, solving problems between neighbors and advancing religious causes, or promoting educational or scientific causes. Organizations that support the prevention of child abuse, juvenile delinquency or animal abuse are also charities under Section 501(c)(3), as are entities that create and maintain public buildings and monuments or those that lessen the burden on government through some other means. Groups that defend human rights and civil rights are also considered charities under this provision of the tax code.
Tax-Exempt Private Foundations
The other type of tax-exempt organization covered by Section 501(c)(3) of the tax code is a private foundation. Unlike a public charity, whose funding comes from multiple sources, a private foundation's funding comes primarily from one source. Typically, corporations and families create these private foundations and provide them with funding. A 501(c)(3) private foundation may be operational or grant-making. An operational foundation runs an activity related to a tax-exempt purpose, such as a museum. A grant-making foundation gives money to public charities and individuals.