501(c) is a designation under the United States Internal Revenue Code (IRC) that confers tax-exempt status on nonprofit organizations. Specifically, it identifies which nonprofit organizations are exempt from paying federal income tax.
The government offers this tax break to promote the presence of organizations that exist purely for the public good. Common tax-exempt organizations include charities, government entities, advocacy groups, educational and artistic groups, and religious entities.
Key Takeaways
- Section 501(c) of the Internal Revenue Code designates certain types of organizations as tax-exempt—they pay no federal income tax.
- Common tax-exempt organizations include charities, government entities, advocacy groups, educational and artistic groups, and religious entities.
- The 501(c)(3) organization is probably the most familiar entity.
- Donations to certain qualified tax-exempt organizations may be deductible from a taxpayer’s income.
Types of 501(c) Organizations
Under subsection 501(c), there are multiple sections that delineate the different types of tax-exempt organizations according to their purpose and operations.
The most common include:
- 501(c)(1): Any corporation organized under an act of Congress that is exempt from federal income tax
- 501(c)(2): Corporations that hold a title of property for exempt organizations
- 501(c)(3): Corporations, funds, or foundations that operate for religious, charitable, scientific, literary, or educational purposes
- 501(c)(4): Nonprofit organizations that promote social welfare
- 501(c)(5): Labor, agricultural, or horticultural associations
- 501(c)(6): Business leagues, chambers of commerce, etc., that are not organized for profit
- 501(c)(7): Recreational organizations
Groups that might fit these categories must still apply for classification as 501(c) organizations and meet all of the stipulations required by the IRS. Tax exemption is not automatic.
Understanding 501(c)(3) Organizations
The 501(c)(3) organization is probably the most familiar tax category under Section 501(c) of the IRC. It encompasses nonprofits that people commonly engage with and donate money to.
In general, there are three types of entities eligible for 501(c)(3) status: charitable organizations, churches/religious entities, and private foundations.
Other Types of 501(c) Organizations
The 501(c) designation has expanded over time to cover more types of organizations. Other qualifying organizations can include:
- Fraternal beneficiary societies providing for the payment of life, illness, and other benefits
- Teacher’s retirement fund associations that are local and non-profitable
- Benevolent life insurance associations that are local
- Certain mutual cooperative electric and telephone companies
- Nonprofit cooperative health insurers
- Cemetery companies operating for the exclusive benefit of their members
- Credit unions without capital stock
- Insurers—with gross receipts less than $600,000
- Various trusts for supplementing unemployment benefits and pensions
- Organizations consisting of current and former members of the armed forces or their supporting auxiliary units
Tax-exempt organizations must file certain documents to maintain their status.
Tax-Deductible Donations to 501(c) Organizations
Besides being tax-exempt, 501(c) organizations offer a tax advantage to donors: a portion of donations may be deductible from a taxpayer’s adjusted gross income (AGI). Organizations falling under section 501(c)(3)—primarily charities and educational nonprofits—qualify for this benefit.
Individuals who itemize deductions on their tax return may deduct contributions to charitable organizations up to 50% (or 60% for cash contributions) of their AGI. Organizations themselves often advise donors on the deductibility of contributions. For example, a $100 museum membership could result in a $50 tax-deductible benefit.
What Is the Meaning of a 501(c) Organization?
If an organization bears the 501(c) designation, it is a nonprofit concerned with providing a public benefit, exempt from paying federal income taxes. The 501(c) category includes many types of organizations, such as charities and religious entities.
Difference Between a 501(c) and a 501(c)(3)
Though both 501(c) and 501(c)(3) are tax-exempt categories under the IRC, 501(c)(3) organizations specifically pertain to charitable purposes, potentially allowing donors to deduct their contributions on tax returns.
What Are the Types of Nonprofits?
The IRS lists many nonprofit organizations qualifying for 501(c) status. Common examples include charitable organizations, religious entities, social advocacy groups, and trade organizations.
The Bottom Line
Nonprofit organizations providing public benefits are vital to society. The U.S. government rewards these entities with 501(c) status and tax exemption to help them flourish. This recognition isn’t limited to charities but includes various nonprofit organizations, including some credit unions and insurers.
Related Terms: nonprofit organization, federal income tax, charitable donations, IRS
References
- U.S. Government Publishing Office. “Title 26-Internal Revenue Code”, Pages 1455-1456.
- Internal Revenue Service. “Application for Recognition of Exemption”.
- U.S. Government Publishing Office. “Title 26-Internal Revenue Code”, Pages 1456-1459.
- Internal Revenue Service. “Publication 557”.
- USA.Gov. “Donating to Charity”.
- Internal Revenue Service. “Tax Exempt Organization Search: Deductibility Status Codes”.
- Internal Revenue Service. “Tax Exempt Organization Search”.
