How to Protect a 501 C 3 Status

By Shelly Morgan

Many organizations that operate for a charitable purpose apply to the Internal Revenue Service to become a 501(c)(3) organization. The chief benefit of being a 501(c)(3) is that donations to the organization may be tax deductible. Since this can boost the organization’s income, protecting the 501(c)(3) status is very important. Hundreds of organizations lose their 501(c)(3) status every year, often unnecessarily.

Many organizations that operate for a charitable purpose apply to the Internal Revenue Service to become a 501(c)(3) organization. The chief benefit of being a 501(c)(3) is that donations to the organization may be tax deductible. Since this can boost the organization’s income, protecting the 501(c)(3) status is very important. Hundreds of organizations lose their 501(c)(3) status every year, often unnecessarily.

Filing Requirements

A 501(c)(3) organization must satisfy the annual filing requirements of the IRS. Even though the organization is exempt from paying taxes, it must still file a federal tax return. Organizations with revenues less than $50,000 can file a 990EZ, also known as an e-Postcard. Larger organizations must file a 990. Organizations that fail to file for three years in a row automatically lose their 501(c)(3) status.

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Political Activities

Engaging in political activities can jeopardize a 501(c)(3) status. 501(c)(3) organizations must not participate in political elections for local, state, or federal offices. They must also limit their lobbying activities to an “insubstantial” part of their total activities. Interpretations of “insubstantial” have varied over the years. Given the vagueness of the law, you should consult an attorney or an online legal provider if your organization intends to engage in lobbying activities.

Charitable Purpose

When an organization initially applies for 501(c)(3) status, it must declare a charitable purpose. Deviating from the organization’s stated charitable purpose can jeopardize its tax status. The activities of the organization must exclusively serve its charitable purpose. For example, an organization whose stated purpose is assisting autistic children might place its tax-exempt status at risk if it serves hyperactive children, instead.

Insurance Issues

The 501(c)(3) must not provide commercial-type insurance as a substantial part of its activities. For example, if an organization hosts a fundraising gala, it can protect their nonprofit status by looking to other commercial insurers to provide insurance for that event. The organization must not self-insure. The rational is that the organization would be putting assets that are supposed to be used for charitable purposes at risk if it self-insures.

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Rules & Regulations for Non Profit Foundations

References

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Rules of Nonprofit Lobbying

The Internal Revenue Code provides rules for nonprofits regarding lobbying and involvement in political campaigning. Categories of nonprofits include those exempt from taxes under 501(c)(3) and those exempt under 501(c)(4). While 501(c)(3) organizations are not entirely restricted from lobbying activities, restrictions apply regarding the amount of money they can spend on these activities. If a nonprofit violates the restrictions imposed by the Internal Revenue Code, it may have to pay excise taxes and its tax-exempt status may be revoked.

Foundation Vs. 501(c)(4)

According to the Internal Revenue Code, a foundation qualifies as a 501(c)(3) nonprofit organization. The Internal Revenue Code identifies 501(c)(4) organizations as nonprofits as well. However, these two types of nonprofits are distinct from each other in that they provide different services and are organized for different purposes.

Rules for 501(c)3 Corporations

Many charities pursue 501(c)(3) status because it allows organizations to avoid certain taxes and accept tax-deductible donations. The Internal Revenue Service grants 501(c)(3) status to charitable organizations that meet the requirements set forth in the Internal Revenue Code. While charities are first organized under state law, the IRC restricts the activities and profit distributions of 501(c)(3) organizations, also known as exempt organizations.

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