Requirements to Maintain 501(c)(3) Status

By Stephanie Kurose, J.D.

Requirements to Maintain 501(c)(3) Status

By Stephanie Kurose, J.D.

You may have heard certain nonprofits refer to themselves as 501(c)(3) organizations. Section 501(c)(3) of the Internal Revenue Code allows certain nonprofit groups, including churches, charities, educational institutions, and other organizations, to be exempt from paying federal income taxes. The Internal Revenue Service regularly audits exempt groups to make sure they follow regulations and do not engage in any activity that would jeopardize their tax-exempt status. Maintaining this status is not difficult, but it does require you to take certain steps to stay in compliance. Failing to adhere to the guidelines may result in the group losing its tax-exempt status.

Laptop with the words "non profit" displayed on the screen

Exemption Requirements

To qualify for tax exemption under Section 501(c)(3), an organization must generally be charitable and not-for-profit. The organization cannot organize or operate for the benefit of any private interests.

These groups are under restrictions when it comes to how much political and legislative activity they can engage in and how much lobbying (attempting to influence legislative activity) they can do. They also may not contribute to any political campaign or particular candidate.

Maintaining 501(c)(3) Status

Once your organization receives approval from the IRS, you still need to take steps to maintain its status and qualify for tax exemption.

Required Filings

The IRS generally requires 501(c)(3)s to file annual returns, depending on its gross receipts and total assets. Certain nonprofit groups with very small budgets may be exempt from this requirement. However, state law may also require them to file reports annually or biannually.

Jeopardizing Exemption

A nonprofit group can jeopardize its exemption if it does any of the following:

  • Participates in political campaigns of candidates for local, state, or federal office
  • Engages in lobbying activities as a substantial part of its total activities
  • Operates in a way unrelated to its exempt purpose
  • Engages in activities that violate fundamental public policy
  • Fails to file required annual returns or notice for three consecutive years
  • Operates for the benefit of private interests

As a general rule, any 501(c)(3) should refrain from all political campaign activity. This includes contributing to a campaign, endorsing a particular candidate, and even making a public statement for or against a candidate.

Unrelated Business Income

A nonprofit organization may not have substantial amounts of income derived from an activity unrelated to its exempt purpose. Unrelated business income can include money made from renting out office space or selling merchandise. Although the nonprofit is exempt from certain taxes, it must still pay taxes on unrelated business income by filing an Exempt Organization Business Income Tax Return ( Form 990-T).

Maintaining a 501(c)(3) status is critical to continue benefiting from the tax exemptions federal law provides. However, it can be a daunting task to make sure your organization meets all of the requirements each year. Stay in the loop about any restrictions and duties related to your nonprofit status by regularly reviewing the expectations laid out by the IRS. An experienced accountant may also be able to assist you in managing any tax paperwork.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.