The Alpha dog of the nonprofit world is the 501(c)(3). It has federal income tax exemption, contributions to it are tax deductible to the donor and it is potentially state sales & property tax exempt. Not bad.
The government provides incentives like these when an organization’s purpose is: religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international sports competition or prevention of cruelty to children or animals. But what about the other nonprofit organizations? What are their purposes and what benefits do they get? We’ll talk a little about the three most popular nonprofits other than the more well known 501(c)(3).
The IRS identifies many categories of tax-exempt organizations, including 501(c) code sections 2-27. These categories encompass organizational purposes from mutual insurance to farming coops to cemetery associations. Three particular “501(c)” groups, however, make up the bulk of all non-501(c)(3) organizations. They can obtain federal income tax exemption, but contributions to these organizations are not tax deductible to the donor. They also have specific purposes that determine their classification and what they are allowed to do. And unlike 501(c)(3) organizations which apply for tax-exemption by filing Form 1023, these organizations have a very different filing application, Form 1024. Interestingly, the lack of tax-deductible donations often results in a slightly less-cumbersome IRS review process.
Here’s the big 3:
501(c)(4)
Civic Leagues, Social Welfare Organizations, etc.
These organizations tend toward advocacy work, political actions, lobbying, environmental purposes, homeowners’ associations and various community associations. Interestingly, it is not uncommon to find some organizations occupying the ranks of 501(c)(4) that would normally be considered 501(c)(3) if it were not for particular activities such as substantial lobbying or political candidate endorsements…things prohibited under 501(c)(3).
501(c)(6)
Business Leagues, Chambers of Commerce, etc.
Trade associations and professional associations are considered business leagues. These organizations typically promote higher business practices, better business methods, establish and maintain integrity within an industry and operate a trade publication to benefit an entire industry. Just like with 501(c)(4), some 501(c)(6) organizations have activities that are similar to 501(c)(3), such as educational programs, but are specifically geared toward promoting the business interests of companies or individuals.
501(c)(7)
Social and Recreation Clubs
These are clubs organized for recreation, pleasure, social activities and other similar nonprofit purposes. These organizations include college fraternities or sororities, country clubs, hobby clubs, garden clubs, etc.
These three 501(c) classifications have a use and provide a beneficial function for the nonprofit world. They provide an option for people to conduct activities that are not a for-profit business, but do not qualify for a 501(c)(3). For more information about the all the rest of the 501(c) family, see IRS Publication 557.
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I was wondering, if my church obtained a state tax exemption will I still need to obtain a 501(c)3 for my church… to be exempt as well as protecting the donors?…
According to what I have just learned this year as I understand it, if a church does not not obtain a 501(c)3 then their contributors will not be able to claim their contributions that were donated.
Not so. Churches are a unique category of 501(c)(3) in that they are considered federally tax-exempt even without obtaining a formal IRS letter of 501(c)(3) determination. In our opinion, relying on the statutory status is not a good long term plan. Active churches are better served from having an IRS determination letter. But, in the short run, there is no harm in not having it. Donations are still deductible to the donor.
We are currently in the process of starting a travel baseball team, we would like to know if we can register our team as a non-profit organization. Our goal is to eventually start doing some fund raising to cover some of the team’s expenses. Perhaps, we might not be qualified to pursue this avenue. Please advise.
Baseball mom,
Yes…youth sports programs can (usually) qualify as 501(c)(3) nonprofits on the basis of being educational. It is often a great way to go. The same steps are involved as is the case with most all 501(c)(3) organizations: nonprofit incorporation followed by seeking 501(c)(3) tax exemption from the IRS.
We have worked with hundreds of such programs. If you decide to go this route, we can make it easier for you. Good luck!
Does a 501c4 have to publish the minutes from its monthly board meetings? If so, is it sufficient to post them directly to the 501c4′s website?
There is no such specific requirement under IRS regulations, but it certainly is not a bad thing to do. Publishing them on the organization’s website is a great place to allow such visibility into the work the board is conducting.
Some of my girlfriends and I are wanting to start a social club. We will mostly do things that are for pleasure and social engagement. We do plan on doing a few charitable things like raising money for Relay for Life, helping with toy drives and food drives, and things of that nature. Is it necessary for us to register with the IRS as a 501 (c) 7?
Maybe…maybe not. Typically, if your operations will generate less than $5,000 gross revenue (not net), then you can essentially operate it as a “club” of sorts. You can assume 501(c)(7) classification, though you will be doing so without any official designation. If your club will normally receive more than $5k, from all sources, you should take steps to be officially recognized by the IRS, lest you be considered a taxable business.
I am a for-profit (tax status) consultant helping child welfare systems learn to use data to improve service delivery. I am getting killed on taxes, and wonder if I can change my status to a 501 c 4. Thanks! Love what I do, but can’t afford to continue with the tax situation!
It is tough out there for everybody right now…for-profits and nonprofits alike. Not a lot of details in your question, but it doesn’t sound like a 501(c)(4) activity to me. 501(c)(4)s are what’s called social welfare/public benefit organizations. A lot of c4s are advocacy groups like AARP or National Right to Life. Providing a paid consulting service, even if to an exclusively nonprofit client base, will not typically qualify as a tax-exempt purpose under any 501(c) code section. Sounds to me like you need the services of a good tax planning accountant more than you need tax exemption. More than likely, some restructuring of your compensation system will alleviate much of the tax problem. Plus, you probably do not want to give up the level you would have to do.
Good luck!
I have a c3 and a c4. Our c3 has a IRS determination letter with our 501c3 tax ID number on it. Should our c4 have a letter from the IRS, too?
Absolutely! I assume (hopefully) that the c4 is a separate, legal corporate entity. That would be a good start. But until you have applied for and received tax exemption from the IRS as a 501(c)(4), it isn’t a c4.
I am curious, I am investigating as much as I can. After reading your reply on July 6, 2009. I have a ministry that helps parents of children who have died. I raise money to bury these children. Do I or do I not need a 501 (c) 3.
And is it expensive to apply for this exemption. Do I also need the (c) 4.
Thank you, Vicki
I don’t see any reason you would need a 501(c)(4). And, unless your contributors are expecting a tax deduction, you likely do not need to formalize into a 501(c)(3). I recommend having a financial means-test to determine who to help. If your donors want tax deductibility, of course, you will need to have a 501(c)(3) determination.
I’m currently considering creating a non-profit tax-exempt 501(c)(something) organization that would support the income and benefits of a certain government workers for up to 12 months should they get released due to staff reductions, downsizing or contract termination. Interested workers could join, contributing monthly in support of the organization and in order to benefit…this would be the main sounce of organization revenue besides grants and outside donations. Having this program could alleviate state and federal government being burdened with unemployement benefits. The program would also use the released workers to educate high school students on government careers. Would like to know the most beneficial 501(c) to register this under.
What you are describing is really a form of insurance and, as such, would not qualify. Plus, the only way to alleviate state and federal obligations under current labor law would be to change federal law. Not likely to happen. Great idea, though.
We completed and submitted our 1023 Form requesting tax exempt status as a 501c3 organization. We got a brief reply from the IRS stating that we are exempt as a 501c4 organization. This letter came without explanation or even acknowledgement of our 501c3 application. I’m not confident that we’ll be able to grow as a nonprofit since virtually all funding for nonprofits excludes 501c4′s. Their decision feels arbitrary and capricious. Have you ever heard of such treatment? What are the chances that they would change their determination? I’m on hold with the IRS waiting to speak with someone.
I have often seen organizations that thought they qualified for 501c3, but were better suited to another code section like 501c4. I don’t think we have ever seen the IRS just issue a determination letter as something other than what you filed for. That should have required that you reapply via Form 1024. Are you sure that what you got wasn’t a response letter from your case reviewer that you are better suited for 501c4?
We have a non-profit that has been filing as a 501(c)3. During 2009, we realized that our activities lent to us being a better fit as a 501(c)6. We filed with the IRS in December, and in February they accepted us as being a 501(c)6.
My question is, for our tax return due for 2009, do we file as a 501(c)6 for the entire year? Do we need to do a partial year, or are we not allowed to file the 990 as a 501(c)6 until 2010?
I’m not sure how to answer this one without more info. Look at the effective date on your IRS determination letter. If it is backdated into 2009, you probably need to file as a 501c6, but there are other factors. I recommend you seek assistance with this to make sure you do it right. We prepare hundreds of 990s every year, so let us know if you need help.
I am also a baseball mom and we are putting together some summer ball leagues. We are fixing to file for our 501c3 as an educational organization. Currently we only have funds from parents as registration fees. We plan to do some fundraising and also taking donations. My question is that we might in the future pay experienced coaches to coach the players. If we do this do we need to file for a 501c7? What are the differences between the two? I read somewhere that are donations would not be a tax write off for our donars if we are a 501c7. Can we be a 501c3 and pay a coach?
Thanks,
Karissa Sullivan
You absolutely CAN pay a coach as a 501(c)(3). Not a problem. A c7 is a recreational organization and some sports groups file under this…especially adult groups. Kids’ sports are usually filed under c3, however, because it is considered educational to promote athletics to children. And, you are correct. Donations to c7 groups are not tax deductible.
Can you use a 501(c)(6) status to apply for grants, or do you need to have a 501(c)(3)? Which status would you recommend as best suited for a farmers’ market? Thank you!
501(c)(6) organizations can apply for grants if the grant maker allows for that in its criteria. Having said that, most grants are intended for charitable organizations.
As to your farmer’s market question, most do not qualify for 501(c)(3). You are more likely to find them organized as 501(c)(5) or 501(c)(6).
I am trying to help an amature adult baseball team get off the ground. We find that alot of local businesses require that organizations have a non-profit id to participate in their programs. I don’t belive we can file as a 501(c) (3) since we are not a youth team, but can we file as a 501(c)(7) org? I have also read that if your organization budget is under $5,000 you may not have to register, but can still be function as a 501(c)(7) how does that work?
Any information would greatly help!
Thanks!
Erin…Your organization most likely would qualify as a 501(c)(7) given its recreational nature. “Adult” is the key here. Children’s sports programs can usually qualify as 501(c)(3)s due to it being considered educational. Having said that, your organization can operate as a defacto 501(c)(7) without having to apply to the IRS if it has less than $5k in revenue per year. You basically fly under the radar and get left alone by Uncle Sam. The problem with that lies with the businesses, though. Most will want to see official IRS recognition of your tax-exempt status. For many of them, just saying we are will not be enough.
Greg – great post and lot of good info in your comments
I am thinking of starting a business league to improve business conditions in my state for a particular industry. It would conduct mostly advocacy, but would also lobby during the state’s regular session(s); however, it would not give directly to candidates for office. From what I’ve been reading here and elsewhere, it seems to be best suited as a (c)6. Agree?
Subsequently, would business donors possibly be able to deduct as a business expense their dues, or a portion thereof, on their tax returns if the “league” does get (c)6 status? Same question for sponsors/donors who give over any dues amount.
Sounds like a 501(c)(6) would indeed be the way to go. You are correct that dues, while not deductible as a charitable donation, can be considered a deductible business expense. Voluntary donations above the cost of dues may not be deductible, however, due to the lack of attributable expense category. You might be able to consider it a lobbying expense if it were designated toward such efforts. Sort of a gray area…
Are 501(c)7 organizations subject to the same private benefit test as 501(c)3 organizations. For instance, could a 501(c)7 organization members sell holiday wrapping paper to offset each individuals cost of travel to tournaments? I understand that this practice, although common, is illegal.
Great question. With a 501c7, you do not have tax deductibility of contributions like you do with a 501c3, so the rules are usually more flexible. That being said, private inurement rules still apply. Your example of the wrapping paper sale is NOT acceptable in the eyes of the IRS. You’re right…it happens all the time, but improperly.