a non-profit public charity and a foundation that is operating privately and which is federally exempt from paying taxes, under section 501(c)(3) of the US Internal Revenue Code.
The top unique provision that a 501(c)(3) organization can benefit from is that, in comparison with other tax-exempt companies, the donations collected by a 501(c)(3) are tax-deductible. 26 USC 170 is the legal provision that incites such a deduction, due to federal income purposes, for charitable donations given to most kinds of 501(c)(3)organizations.
Other unique provisions that encompass 501(c)(3) organizations vary per state. However, under federal laws, many states legally implement the deduction of taxes for state income taxes. Additionally, several states legalize 501(c)(3) organizations from being exempt from paying sales taxes for purchases made and being exempt from paying for property taxes.
501(c)(3) organizations must explain how they benefit the public. These organizations have to prove that they are organized and operate under an approved mission. To be qualified as a 501(c)(3) organization, the organizations must fall under charitable missions such as:
- Public Safety Testing
- National or international amateur sports-related organizations
- Organizations that aim to avoid cruelty to animals and children
- Organizations that bring relief to the poor, the distressed, and the unfortunate
Real-World Example of 501 (c)(3) Organizations
The Church of Jesus Christ of Latter-day Saints qualifies as a 501 (c)(3) organization under public charity. Members of the Church of Jesus Christ of Latter-day Saints donate 10% of their monthly income to fund church activities, local charity programs, and even global humanitarian efforts. After donating, members of the Church of Jesus Christ of Latter-day Saints can use their donations as a tax deduction.
Types of 501(c)(3) Organizations
The primary categories of 501(c)(3) organizations are public charities, private foundations, and private operating foundations.
- Public Charities - organizations that the public comes to know as having active programs. Examples of public charities include churches, benevolence organizations, animal welfare, and educational organizations, etc. A significant portion of the public charities’ revenues come from charitable donations from the public and the government.
To remain a public charity, 501(c)(3) organizations must have a minimum of ⅓ of their donated revenues from a broad base of public support. Public support can come from community members, companies, and/or other public charities.
Individuals who donate to public charities can have their taxes deducted on their donations, up to a maximum of 60 percent of the donors’ income. If the donors are corporations, then a maximum of 10 percent of their income is deductible for taxes. Public charities also have to form and maintain governing committees, comprising mostly of independent and unrelated people.
- Private Foundations - referred to as non-operating foundations, as they generally do not have active programs. These foundations do not require public support. Donations for these foundations can come from community members and families.
Donations provided to private foundations can have their taxes deducted up to a maximum of 30 percent of the donors’ income. One example of a private foundation is a family foundation.
- Private Operating Foundations - the least common type of 501(c)(3)organizations. These foundations commonly have active programs similar to those found in public charities but may exhibit characteristics similar to those found in private foundations. The majority of the earnings or donations given to these foundations go to conducting programs. Donation tax-deductibility assimilates that to public charities.