There are three key components for an organization to be exempt from federal income tax under section 501c3 of the IRC. A not-for-profit (i.e., nonprofit) organization must be organized and operated exclusively for one or more exempt purposes.
A 501c3 organization must be organized as a corporation, trust, or unincorporated association.
An organization’s organizing documents (articles of incorporation, trust documents, articles of association) must: limit its purposes to those described in section 501c3 of the IRC; not expressly permit activities that do not further its exempt purpose(s), i.e., unrelated activities; and permanently dedicate its assets to exempt purposes.
Because a substantial portion of an organization’s activities must further its exempt purpose(s), certain other activities are prohibited or restricted including, but not limited to, the following activities.
A 501c3 organization:
Must absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office
Must restrict its lobbying activities to an insubstantial part of its total activities and must ensure that its earnings do not inure to the benefit of any private shareholder or individual
Must not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests and must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory
May not have purposes or activities that are illegal or violate fundamental public policy
To be tax-exempt, an organization must have one or more exempt purposes, stated in its organizing document. Section 501c3 of the IRC lists the following exempt purposes: charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.
The most common types of 501c3 organizations are charitable, educational, and religious.
Charitable – Charitable organizations conduct activities that promote:
Relief of the poor, the distressed, or the underprivileged
Advancement of religion
Advancement of education or science
Erection or maintenance of public buildings, monuments, or works
Lessening the burdens of government
Lessening neighborhood tensions
Eliminating prejudice and discrimination
Defending human and civil rights secured by law
Combating community deterioration and juvenile delinquency
Educational organizations include:
Schools such as a primary or secondary school, a college, or a professional or trade school
Organizations that conduct public discussion groups, forums, panels, lectures, or similar programs
Organizations that present a course of instruction by means of correspondence or through the use of television or radio
Museums, zoos, planetariums, symphony orchestras, or similar organizations
Nonprofit day-care centers, youth sports organizations
The term church includes synagogues, temples, mosques, and similar types of organizations. Although the IRC excludes these organizations from the requirement to file an application for exemption, many churches voluntarily file applications for exemption. Such recognition by the IRS assures church leaders, members, and contributors that the church is tax-exempt under section 501c3 of the IRC and qualifies for related tax benefits. Other religious organizations that do not carry out the functions of a church, such as mission organizations, speakers’ organizations, nondenominational ministries, ecumenical organizations, or faith-based social agencies may qualify for exemption.