Is Your Nonprofit Classified Correctly?
Charitable organizations are defined by the IRS as “organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements.” Such organizations are tax-exempt under Internal Revenue Code Section 501(c)(3).
There are three main categories of 501(c)(3) organizations: private foundations, public charities, and churches and other religious organizations. The latter aren’t required to receive formal recognition of their tax-exempt status or submit annual tax returns, but they must meet the same requirements as other charitable organizations.
A private foundation is created and funded by one or more benefactors who make grants to other charitable organizations. The initial donation is invested to generate income that is dispersed to individuals or other charities in accordance with the foundation’s charitable purpose.
A public charity solicits donations from the community to support its mission. To qualify, the charity must receive at least one-third of its contributions from the general public or meet the 10% “facts and circumstances” test. A board of directors ensures that the charity is not operated for the benefit of private interests.
In addition, other types of organizations meeting specific requirements may also qualify for tax-exempt status. These include social welfare organizations, civic leagues (501(c)(4)), social clubs (501(c)(7)), labor organizations (501(c)(5)), and business leagues (501(c)(6)).
It’s critical to make sure that your nonprofit is correctly classified by the IRS. Otherwise, you could be at risk of losing your tax-exempt status or not be eligible to receive contributions from private foundations. You can go to the IRS Tax Exempt Organization Search Tool (Search for tax exempt organizations) to check your classification and make sure the IRS has your most recent Form 990 or 990-PF on file.
Contact us if you have questions about confirming your nonprofit’s classification.
