The Basics of a 501(c)(3)By April VanPutten on August 14, 2017
How many times have you heard the term "501(c)(3)" and wondered where this combination of letters and numbers came from, and what does it all mean? Maybe it's not something you lose sleep over, but it's helpful to know what's behind this configuration of letters and numbers, and what being a 501(c)(3) is all about.
Cracking the Code
The Internal Revenue Service (IRS) is the United States federal agency responsible for collecting income taxes. The Internal Revenue Code (IRC) is the federal tax law of the United States, enforced by the IRS and contains over 9,800 sections that are specific to various types of taxes.
- IRC Section 501 refers to corporations that are exempt from income taxes.
- Subsection c provides a list of the types of organizations that may be exempt from income taxes.
- Paragraph 3 of this subsection is where we find the description of a 501(c)(3) organization: A corporation that is organized and operated for an exclusive purpose, the most common being religious, charitable or educational purposes.
501(c)(3) organizations cannot have net earnings that benefit an individual person, not be heavily involved in lobbying the government and not support any political campaigns.
Now that we've cracked the code, let's take a test.
Can your organization pass the test?
It would be great if establishing a 501(c)(3) were as simple as your organization's purpose being one of the purposes mentioned in this section of the IRC. However, before the IRS will grant your 501(c)(3) status, the organization has to pass a test.
Section 509, subsection a of the IRC contains the various tests that qualify an organization as a 501(c)(3) charitable organization. An organization needs to only pass one test to be granted charitable status. What are these tests?
Test #1: The Description Test
The type of organization is described in yet another section of the IRC—Section 170. These include churches, educational organizations, medical or hospitals, support of a state college, governmental units and organizations that receive more that 33 1/3% public support.
Test #2: The Public Support Test
This test examines the sources of revenue that the organization collects and a simple division problem helps to determine if more than one-third of the sources of revenue come from the public.
Test #3: The Relational Test
The organization exists for the purpose of supporting or helping to carry out the purpose of an organization listed in Test #1.
Test #4: The Public Safety Test
The organization's purpose is to test for public safety.
Sounds like a lot of hoops...is it worth it?
When an individual, or group of individuals, starts investigating starting a 501(c)(3) organization, they are likely very passionate about the mission and purpose of the organization. Often, they are looking to improve their community or meet the needs of a population. The founders should be familiar with the IRC sections so they can establish the mission and purpose with the IRC in mind.
It's important to note that an organization can lose their charitable status if they fail to pass one of the above tests in a given year.
The IRS requires non-profit organizations to file the IRS Form 990 on an annual basis. This form includes information, like the purpose of the organization and a schedule that calculates public support. The board and leaders of a non-profit organization should keep these guidelines in mind when they start new programs or look for additional funding so they aren't at risk of losing their public charity status.
Ultimately, seeking 501(c)(3) status as a charitable, non-profit organization, is well worth the time and energy it takes to research and comply with IRS guidelines. The reward of impacting the community has the potential to outweigh the risks at any given time.
Knowing is Half the Battle
If you are interested in starting a 501(c)(3) organization, do your homework up front.
- Research IRS regulations and IRC codes pertaining to non-profits.
- Find a lawyer that is knowledgeable about non-profit start-ups. The amount of money spent on a lawyer during start-up could save a lot of headaches and money by ensuring the organization is compliant with government qualifications.
- Know the community's needs and identify how the non-profit will meet those needs and improve the community overall.
- Identify potential board members and draw from their experience.
- Research available funding sources and be able to "sell" the idea and mission to potential investors.
- Surround yourself with people who have a passion for the mission of the non-profit and watch your idea change lives!
A 501(C)(3) Goes Well With a Degree
There's a lot to understand about starting and continuing a non-profit organization. PGS offers several degree programs—such as business administration and leadership, ministry leadership, organizational management and more—that can equip you to put this 501(c)(3) information into practice.