Image courtesy of user AmberAvalona on Pixabay.com

Image courtesy of user AmberAvalona on Pixabay.com

The term “501(c)(3)” refers to a type of not-for-profit, tax-exempt entity. The term is used a lot but people don’t always know exactly what it means.

Basic Terms

First of all, the terms not-for-profit and tax-exempt are not interchangeable. As I wrote about in this post, “not-for-profit” is a legal term that has meaning at the state level.

“Tax-exempt” is a federal tax law term and refers to a not-for-profit that is exempt from paying federal income tax.

Underneath the tax-exempt umbrella, there are more than 25 ways an organization can qualify as being tax exempt.

The code section dealing with tax-exempt organizations is Section 501.

A 501(c)(3) organization is one type of tax-exempt organization as outlined in Section 501(c)(3) of the Internal Revenue Code. The Code defines a 501(c)(3) organization as:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals

Other common types of tax-exempt organization include organizations organized under Section 501(c)(4) and 501(c)(7).

What’s the Big Deal About 501(c)(3)?

The reason 501(c)(3)s get so much discussion is because donations to a 501(c)(3) are tax deductible as a charitable contribution by the donor.

Donations to other types of tax-exempt organizations are not deductible by the donor.*

(*-But see this post where I discuss how a business might be able to take a deduction as an advertising expense for giving to other types of tax-exempt organizations.)

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”