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.
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.
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.
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.
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.