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How the IRS Defines Charitable Purpose

How The IRS Defines Charitable Purpose

When you hear the term nonprofit, the first thing that typically comes to mind is a charity, or 501(c)(3) organization.  That’s for good reason, since roughly 78% of all tax-exempt organizations are exempt under IRC Section 501(c)(3).  The remaining 22% consists mostly of social welfare nonprofits, business leagues, and social/recreation clubs, plus about 24 less-voluminous possibilities.

But, what does it mean to be a 501(c)(3) nonprofit?  What sets a 501(c)(3) apart from the other categories of nonprofits out there?  In a phrase:  charitable purpose.

In order to qualify as a tax-exempt, 501(c)(3) organization, a nonprofit must exist for one or more exclusively charitable purposes.  Fortunately, the Internal Revenue Service gives us a list of the purposes that they deem to be charitable in IRS Publication 557:

  • Religious
  • Charitable
  • Scientific
  • Testing for public safety
  • Literary
  • Educational
  • Fostering of national or international amateur sports, and
  • Prevention of cruelty to animals and children

They even give a few examples of organizational types in each category.  While the information in Pub 557 is informative, it is far from exhaustive.  And, given that the examples they provide are so few, it can often be challenging for someone looking to start a new nonprofit to determine exactly where their idea fits in the list of purposes.  Let’s examine each of these purposes in detail.

Religious

The IRS says that to qualify as a religious 501(c)(3), a nonprofit has to satisfy two basic guidelines:

  1. That the particular religious beliefs of the organization are truly and sincerely held and,
  2. That the practices and rituals associated with the organization’s religious belief or creed aren’t illegal or contrary to clearly defined public policy.

As long as those two guidelines are met, the religious exemption threshold is fairly easy to meet.  Examples include churches, conventions or associations of churches (denominational or other hierarchical church structures), para-church religious ministries (missions organizations, evangelistic associations, etc.), integrated auxiliaries of churches (example:  Catholic Charities), and institutions of religious instruction (seminaries, etc.).

Qualifying as a church has the added benefit of not having to file an annual Form 990.  Churches, as well as church associations and integrated auxiliaries, are exempt from filing Form 990.  As such, qualifying as a church requires a stricter standard than other religious purposes.  In addition to the two standards above, the IRS requires church applicants to demonstrate that there exists a current membership or attendee group that meets at a regular place of worship at a regular publicized time.  We have had a number of clients over the years wanting to start “online churches”, only to find out that the IRS hasn’t quite caught up with our cyber culture.  Uncle Sam is still very much of the brick-and-mortar mindset.

Religious nonprofits that do not qualify as a church or church-related entity are not exempt from Form 990.

Scientific

The IRS uses the term scientific here, but it is better understood as scientific research.  What separates charitable scientific research from other, similar work, is the requirement that the nonprofit version must be carried on in the public interest.  Specifically, results of the research (patents, copyrights, processes, or formulas) must be made available to the public without discriminating in favor of private interests.

For example, if a scientific research nonprofit is exploring new treatments for leukemia, its findings should be made publicly accessible.  Equally as important, the research results cannot be used for the private benefit of a person or a company.  You will often see examples of this from university studies or other nonprofit research groups who publish their findings in a medical journal or other publication.  This is contrasted with the commercial model of a pharmaceutical company’s research being used to create a patented drug for the exclusive use of that company.

Other research topics exist well beyond medical.  They can run the gamut from economic modeling to agriculture to climate studies.  The key is that the research results are truly public.

Testing for Public Safety

This one is a bit tricky for some people to grasp.  There is a common misconception that organizations which provide for public safety are what fits in this category.   We often encounter people who think the purpose category is promoting public safety, when in actuality it is testing for public safety.  This distinction is critical, because most public safety nonprofits qualify under 501(c)(4), not 501(c)(3).

So what does testing for public safety mean?  It is somewhat similar to the scientific research purpose above.  To qualify as a 501(c)(3) under this purpose, the nonprofit should have as a primary activity testing finished products, ingredients, or other components specifically for the safe use by the general public.  A great example organization is Underwriters Laboratory.

Literary

Literary purposes are generally confined to nonprofit bookstores or publishing activities.  But, since these activities have obvious commercial equivalents, it is necessary to demonstrate to the IRS just how a particular operation furthers an exclusively charitable purpose, and not a private profit motive.  Examples include religious publishing houses and college bookstores.

Educational

This is one of the broadest 501(c)(3) purposes, and captures a board swath of possibilities.  Specifically, the IRS says that to qualify as an educational charity, you must exist for:

  1. The instruction or training of individuals for the purpose of improving or developing their capabilities, or
  2. The instruction of the public on subjects useful to individuals and beneficial to the community.

Examples are numerous and may include:

  • A primary or secondary school, a college, or a professional or trade school,
  • An organization whose activities consist of conducting public discussion groups, forums, panels, lectures, or other similar programs
  • An organization that presents a course of instruction by correspondence or through the use of television or radio
  • A museum, zoo, planetarium, symphony orchestra, or other similar organization

Other examples include some alumni associations, childrens’ sports leagues, and even nonprofit daycares.

Interestingly, there persists the myth that if a nonprofit’s mission is to educate the public on a certain topic, it must be unbiased in its presentation in order to qualify as charitable.  It is true that the IRS does require public advocacy nonprofits to prove that they are not simply pushing unsupported propaganda.  But, having a bias or tilt to your message is perfectly fine, as long as it’s not blatant bombast.

Fostering of National or International Amateur Sports

Sports-oriented nonprofits can be difficult to know how to categorize, mainly because there are several possibilities.  Purely recreational sports, such as church softball leagues, are usually tagged as 501(c)(7) social or recreational groups…tax-exempt, but not charitable.  Also, youth-only sports groups, such as Little League baseball, can qualify for 501(c)(3) status, but they are considered educational.  Further still, professional athletic competition is a commercial activity, not a nonprofit one.

The groups that qualify for the amateur sports purpose are those that foster serious competition on a larger scale, at least at the regional level.  Great examples of 501(c)(3) amateur sports groups are those that feed into competitions like the Olympic Games, such as USA Cycling or USA Volleyball.  Qualifying groups do not have to rise to this level of competition, but these examples clearly demonstrate the difference between truly amateur athletics and the local YMCA swim club.

Prevention of Cruelty to Children or Animals

Many children’s 501(c)(3) groups will qualify as educational.  This purpose category is restricted to those groups whose purpose is to work for children’s safety or general welfare, as well as that of animals.  Examples could include orphanages, animal shelter/rescues, and endangered species habitat preservation groups.

Sidenote:  I’ve always found it interesting that the IRS lumps these together.  Maybe the person who wrote the regulations was a frustrated parent!

Charitable

I saved charitable to the end, because this one confuses people.  As you know, all 501(c)(3) organizations are considered charitable.  So why is there a specified purpose category with the same name?

A good way to think about this purpose category is to imagine the word “Generally” in front of Charitable.  This is a roll-up category, catching all the qualifying 501(c)(3) purposes that do not neatly fit into one of the ones above.  Example missions include, but are not limited to:

  • Benevolent giving
  • Grant-making foundations
  • Charity hospitals
  • Groups that seek to lessen neighborhood tensions
  • Elimination of prejudice and discrimination
  • Defense of civil rights

There’s a lot more we could say about each of these purpose categories.  In future articles, we will take some of these and go into much greater depth.  Hopefully, this overview provides you with a better understanding of how the IRS defines a charitable purpose.

 

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 18 Comments
  1. A friend has a terminal illness (ALS) and she has young children. A group of us would like to fundraise to help her family with medical expenses and for tuition for her children when they go to college. Is there the possibility that we could form a 501 c 3 if it only benefits her family?

    1. I’m sorry to hear about your friend’s struggles. Unfortunately, you cannot setup a 501c3 for the sole benefit of one family. That doesn’t mean you can’t fundraise through crowdfunding in a non-tax-deductible manner, like GoFundMe. Good luck with it.

  2. Could a thrift store that donates all of its profits to charity constitute as a “charitable” non-profit?

    1. It’s possible. Nonprofit thrift stores can be charitable, given a few factors: 1) Everything they are selling was donated, or 2) All staff members are volunteers, or 3) Both. The net proceeds generated from selling items must be used for a charitable purpose, which could include giving the money to other qualified charities. Keep in mind that it must be organized as a nonprofit, not a business, and receive IRS approval as a 501(c)(3).

    1. I can’t begin to give you “all” the regs in this format. But, it is theoretically possible that a nonprofit could run a housing program using an apartment complex. It would have to be for a qualifying charitable purpose, like very low income housing, temporary shelter, or something similar. It could also be an income-producing property for the nonprofit. Rental income gets an unusual treatment by the IRS and is often not considered taxable business income even though it isn’t part of a nonprofit’s program. It’s way too complicated for a comment section, but it is definitely possible.

  3. Formerly I worked answering telephones for one of the largest NGO’s in the US. In so doing, I gained a grasp on certain FAQ’s pertinent to charitable giving, and I retained some of that information; In this case, I recall that there was a federal requirement that all 501(c)3 organizations had to send a minimum of 78% of all donated funds to the charitable designation, (no more than 22% could be used towards overhead costs).
    Well, I have recently started my own 501(c)3, and am scouring the internet to locate those percentages, and I cannot.
    Do you by any chance know what that figure is?

    1. The reason you cannot find percentages is because there aren’t any, and never has been. It’s a myth. There is often controversy, however, when anyone brings up the dreaded “overhead” conversation. Most charities should be allocating more to program than to overhead. But, what is overhead? Is staff overhead? I think most staff positions constitute program, but others disagree. It’s very subjective.

      This whole conversation is referred to as “The Overhead Myth”. I encourage you to Google the phrase or read this article I wrote on the subject a few years ago: https://www.501c3.org/spending-money-on-overhead-is-ok-says-3-top-nonprofit-oversight-groups/

  4. Hello Mr Greg Mcray,
    We are a small charity registered in UK and trying to reg in America as well, got our EIN in Oct 2018 but just been informed by our rep rep in America our cert for EIN is ready after all these months. We have been doing voluntary in the states and also managed to raise $150 only. I asked our rep in the states if we need to file it as tax but he said the law states that we can receive donations as long as we don’t raise over 10k.. after we get approve for 501c3, then we can file all taxes … Is this true pls? I asked him to file for 501c(3) but he kept saying we need to do more work and fundraising before we can file for the 501c (3). How true is this please?
    Kind regards
    Vanessa Moorhouse

    1. There are a number of issues implicit in your question. With regard to minimum income threshold, I would say that either you are misunderstanding your USA rep, or they don’t know what they’re talking about. If you are going to operate a charitable organization in the US, you need to incorporate and secure IRS 501(c)(3) status, even if you are pre-revenue. That is, unless it is only going to be a short term charitable project. If that’s the case, there’s no real requirement to formalize so long as no donor is considering their gift as tax-deductible. Also, if you don’t formalize into a charity, it probably should be reported as a business for tax purposes, regardless of revenue.

      The $10k limit your rep is referring to may be the state minimum before having to register for charitable solicitation purposes. That is a completely separate issue from the federal situation I described in the beginning of my response. State charity registration typically happens AFTER securing IRS 501(c)(3) status.

  5. Good day, how long does it take to get EIN certified. Our organization sent in the paper work October 2018 and we are still waiting.

    1. That doesn’t sound right, Keith. Usually, EINs are applied for online and issued immediately. Do you mean getting your 501(c)(3) status approved? If so, the IRS is currently working applications received in September 2018, so you’re probably a 1-3 months out.

  6. Thank you for helping Our Journey Through come as far as we have. Even though lack of funding is an issue right now, we are moving forward collaborating with like minded non-profits like Habitat for Humanity and Montgomery Housing Partnership. What great examples to follow.
    Thanks again.
    Shirley

  7. Mr. Greg McRay,
    Are we compliance with State and Federal Tax Law?

    We have a senior softball league and we were wondering if we need to register as a 501(C)(7) based on the following information?
    The league is a recreational softball league non-profit group
    The dues received by the league from players are used exclusively for equipment, insurance, supplies, etc.; for the benefit of all teams in the league. Each team pays its own fee for the uses of the field. (not out of the league dues.)
    No one in the league is paid for any services.
    Total yearly receipts for the league are less than $3,000.
    If individual teams accepted donations/sponsor e.g. to pay for uniforms, and the donor does not claim this as a tax deduction would this affect our need to register as a 501(C)(7)?
    If individual teams accepted donations/sponsor e.g. to pay for uniforms, and the donor did claim this as a tax deduction would this affect our need to register as a 501(C)(7)?

    Thank you for your help,
    J. Rios Division A Rep.
    San Diego Ca.

    1. What you’re describing certainly sounds like a 501(c)(7), not a 501(c)(3). The good news is that a 501(c)(7) group as small as yours can get an EIN and file Form 990-N as a c7 without having to apply for certified c7 status from the IRS.

      Social and recreational clubs like yours should be membership organizations that receive virtually all of their revenue from members. Limited sponsorship revenue should be OK here, as long as the donor doesn’t try to claim it as a charitable contribution or a business expense. Good luck with it!

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