501 (C)(3) Laws
For an entity to receive a tax-exempt status by the Internal Revenue Service (IRS), you must comply with IRS regulations. The regulation of taxable and nontaxable entities is a complicated area, and you are responsible for knowning and following all IRS rules and regulations related to your tax-exempt status. This article offers a general overview of the regulations applicable to a 501(c)(3) organization and explains what these regulations specify.
Other People Are Reading
-
501(c)(3) Organization
-
The classification of a 501(c)(3) entity means that the entity receives an exemption from tax because they are nonprofit. These entities consist primarily of charitable organizations, religious institutions, political groups and foundations. For example, most not-for-profit hospitals, synagogues and churches constitute 501(c)(3) organizations. Other examples of 501(c)(3) organizations include Jerry's Kids, the American Association of Retired Persons, the Ronald McDonald House, the Heifer Association and Save the Children.
Purpose Requirements
-
To be eligible for 501(c)(3) status, the law states that "an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3)." These purposes include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and preventing cruelty to children or animals. Ultimately, the 501(c)(3) organization includes those entities that further charitable or other good works for the public benefit.
-
Private Interests
-
Pursuant to IRS regulations, a 501(c)(3) organization may not be set up in way that benefits private interests. Furthermore, the organization's earnings may not be used to benefit a private person. In other words, nonprofit organizations are permitted to operate efficiently and duly compensate employees; however, only employee salaries must be fair and fall within industry standards. Providing excessive salaries and benefits above and beyond the prevailing amount may result in fines or jeopardize 501(c)(3) status, and, therefore, the organization must take precautions to ensure that this requirement remains fulfilled.
Political Organizations
-
IRS regulations indicate that a 501(c)(3) organization cannot constitute a political action committee, commonly known as a PAC. Furthermore, the organization cannot engage in political campaigning, endorsement or political candidates or campaign for a candidate on behalf of the entity. However, the 501(c)(3) organization may engage in some political lobbying but must be careful to abide by additional IRS regulations pertaining to how the lobbying is done and the extent of the lobbying. For instance, the lobbying must relate to the mission of the organization. Additionally, any lobbying may not constitute a substantial part of the 501(c)(3) organization's work. Failure to abide by this requirement may result in the imposition of a fine or loss of the tax exempt status.
Excess Benefit Transactions
-
In the event that an organization engages in conduct that provides a benefit solely to a private person or is deemed excessive, the 501(c)(3) organization is subject to penalty for this conduct. Such an instance is referred to as an "excess benefit transaction." On occasion, the matter may arise inadvertently. For instance, if a not-for-profit hospital solely recommends a mobile breast mammography provider that costs more money than other comparable providers, and then the mammography provider recommends a certain physician at the not-for-profit hospital, this particular arrangement may indirectly benefit the physician. Such a transaction may constitute an excess benefit transaction. Another example where there is direct conduct is when a person is paid twice the normal salary as a similarly situated person without justification. In any event, if an excess benefit transaction exists, the tax exempt status is jeopardized.
-
