A subsection under the Internal Revenue Code (IRC) identifies which organizations are exempt from some federal income taxes.
Any organization that meets the criteria set by the 501(c) subsection is known as a 501(c) organization. Some states in the US free these organizations from state taxation, not just federal taxation. Donations and contributions from individuals or groups may also be tax-deductible. For an organization to be a federal tax-exempt 501(c), it needs to be one of at least 29 types of non-profit organizations that meet the requirements.
The tax-exemption status held by 501(c) organizations doesn’t excuse them from having to file annual or special-purpose tax return reports containing the entity’s financial information. The report is sent to Internal Revenue Service (IRS) as Form 990. Form 990 is otherwise known as the “Return of Organization Exempt From Income Tax.”
501(c) organizations need to file Form 990 (or other similar returns) regularly and make it public. Religious entities and most other organizations whose annual gross receipts are less than $5,000 don’t have to make such reports. Failure to file the required returns may revoke the tax-exemption status of the organization. Furthermore, the organization may be subject to fines of up to $250,000 per year if violations are found.
Example of 501(c)
One of the most prevalent examples of 501(c) organizations is universities. Universities fall under the 501(c)(3) designation as one of the 29 types of 501(c) organizations. Their income comes from tuition, and other fees are tax-exempt. Moreover, universities may also accept tax-deductible donations from third-parties as long as the funds are for educational purposes.
There are times when universities’ income is not tax-exempt. For instance, let’s say that a college runs a canteen that sells food to all people, students or not. The university fully owns the canteen along with its workers as paid employees. Since this canteen is not related to education, its income is not part of the tax-exempt benefit.
The canteen doesn’t serve any purpose in bettering the university as an educational institution, so any income generated is imposed with a normal tax rate. Despite this, this kind of activity is allowed since it doesn’t go against the 501(c) regulations. However, suppose that the university is covertly engaging in similar arrangements to abuse the tax-exemption benefit. In that case, the IRS may annul the status as 501(c) and impose fines.
Types of 501(c)
Some of the most common types of 501(c) organizations among the 29 available includes:
501(c)(3): Entities operated exclusively for scientific, charitable, religious, literary, educational, fostering amateur sports competition, public safety, or children/animals cruelty prevention purposes.
501(c)(4): Civic organization, neighborhood association, or social warfare entities with the primary goal of improving people’s welfare within the community.
501(c)(5): Labor, horticurtural, or agricurtural organizations.
501(c)(6): Non-profit real estate boards, chambers of commerce, or business leagues.
501(c)(7): Recreational or social clubs used for recreation, pleasure, and/or other non-profit activities.
501(c)(8): Fraternal beneficiary societies and associations whose members have a similar profession, calling, or a worthy goal benefit society as a whole.
501(c)(17): Unemployment benefit trusts.