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Wondering what a 501(c)(3) is and how to get that tax-exempt status to fuel your nonprofit?
You need the right information and steps to file for a 501(c)(3) to ensure you get the crucial funding, tax perks, and credibility you need to grow. A 501(c)(3) is the most common type of nonprofit, and we’ll help you start on the right foot to grow and scale.
Don't risk getting lost in the process. Let’s dive into what a 501(c)(3) is, why it’s a game-changer, and how to apply it so you can hit the ground running!
Section 501(c)(3) is a specific tax category for a nonprofit corporation under the Internal Revenue Code (IRC), allowing tax exemptions for nonprofits. The IRC is the tax law issued by the United States Treasury through the IRS.
The IRS recognizes over 30 types of nonprofits, but only those with 501(c)(3) status can claim tax-deductible donations.
Organizations with 501(c)(3) status receive donations and nonprofit grants from the US federal government. As tax-exempt entities, they can apply for:
501(c)(3) organizations rely on private contributions, grants, and fundraising efforts to cover operational costs, such as administrative and program expenses. While they may charge fees for certain services or events, most revenue comes from donations and grants rather than earned income.
They operate with a purpose recognized by the IRS for federal tax exemption, which includes:
Charitable
Religious
Educational
Scientific
Human and civil rights
Literary
Social welfare organizations
Testing for public safety
Fostering national or international amateur sports competitions
Tax-exempt organizations and nonprofits are often used interchangeably, but not all have tax-exemptions.
Even with a tax exempt status, a nonprofit has to pay taxes. Organizations with federal tax-exempt status don’t have to pay federal corporate income tax on any revenue arising from their purpose-related activities.
The organization must pay federal corporate income tax on an organization's net earnings from business activities other than tax-exempt purposes, termed unrelated business income tax (UBIT). The tax rate for unrelated business income is currently 21%.
Revenue from advertising is the most common form of UBIT. A tax-exempt organization is restricted in how much it can earn without compromising its exempt status.
A 501(c)(3) and 501(c)(4) both qualify for tax exemption. Both tax-exempt organizations under the U.S. IRC, but they have some key differences:
501(c)(3) organizations with tax exemption:
Charitable purposes: Charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports, or preventing cruelty to children or animals.
Tax deductibility: Donations are tax-deductible for donors.
Political activity: Limited. Cannot engage in substantial lobbying or any political campaign activities.
Disclosure: Must disclose donors of $5,000 or more to the IRS (though this information is not public).
Examples: Libraries, religious organizations, etc.
Purpose: Social welfare or local associations of employees.
Tax deductibility: Donations are generally not tax-deductible for donors.
Political activity: They can engage in unlimited lobbying related to their mission and some political activities, as long as it's not their primary purpose.
Disclosure: Donor information is not required to be disclosed to the IRS.
Examples: social welfare groups and organizations, human and civil rights organizations/ organizations that ensure civil rights are secured, etc.
Types of 501(c)(3) Charitable Organizations
1. Public Charity
Public charities are the primary type of 501(c)(3) organizations with tax exemption. These nonprofits have active programs and receive much of their funds from the government or the public.
According to federal law, to qualify as a public charity under 501(c)(3), nonprofit organizations must receive at least a third of their total support from the general public, including individuals, corporations, and other public charities. They center more around general welfare and public interest than to serve a private shareholder.
Individual donors can receive a tax deduction on donations covering up to 60% of their income, while tax deductions for corporations are usually limited to 25%.
The board of directors of public charities must comprise individuals unrelated by blood, marriage, or other business connections.
A private foundation is referred to as a non-operating foundation, as they usually do not have any active programs. These organizations often support the programs of public charities for federal income tax purposes through grants. Donations to these nonprofits can be tax-deductible to individual donors up to 30% of their adjusted gross income.
Private foundations must spend a certain amount of money or property for charity annually. Otherwise, they may see a 30% excise tax under section 4942 on all undistributed income.
The governance of a private foundation is also distinct from that of public charities and is more closely knit. For example, a family foundation is a private foundation run and managed by one family.
Private Operating Foundations (POFs)
Private operating foundations have active programs like public charities with attributes similar to those of private foundations.
The Internal Revenue Service defines a private operating foundation as: “any private foundation that spends at least 85 percent of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities.”
POFs must also meet one of the following tests:
Assets test
Endowment test
Support test
Unlike private foundations, private operating foundations are not liable to pay a 30% excise tax on failing to distribute income. Given that the institute does not manage them, they can also receive qualifying distributions from a private foundation.
This charitable organization has a close governance like private foundations and is usually considered hybrid. Tax deductibility on individual donations to these nonprofits is limited to 50% of an individual donor's adjusted gross income.
3. Churches and Religious Organizations
Organizations such as churches, religious schools, and other organizations are eligible to apply for 501(c)(3) tax-exempt status.
Churches and religious organizations do not require formal recognition or must file annual tax returns while submitting a 501(c)(3) application.
Church groups do not need to formalize their 501(c)(3) designations but must fulfill the exact requirements of other charitable organizations.
Requirements of a 501(c)(3) Nonprofit Organizations
Apart from the purpose approved by the Internal Revenue Service, a charitable organization must fulfill other requirements to be credited as a 501(c)(3).
A charitable organization must not serve any private interests to acquire tax exemption under section 501(c)(3). This includes the interests of:
Founders
Family of founders
Shareholders
Designated nonprofit members
No amount from a nonprofit's revenue can benefit private shareholders. The money is solely for the charitable cause.
A 501(c)(3) charity cannot influence legislation or participate in campaign activities that may support or oppose political candidates. Nonprofit organizations must pay their employees a reasonable salary based on fair market value (FMV).
The 501(c)(3) status is valid till a nonprofit exists, given that it remains true to its purpose. A nonprofit must notify the Internal Revenue Service of any changes in its operations and mission.
Nonprofit organizations are exempt from federal corporate income taxes but must withhold the tax from their employees' salaries. They must also pay Social Security and Medicare taxes.
How to Apply for a 501c3 Status
1. Choose a Purpose for Your Nonprofit
Your nonprofit must pursue one of the purposes dictated by the federal tax laws. Ensure that the nonprofit is designed to benefit the public.
Ask questions like:
Who will benefit from your nonprofit organization offerings?
What is your nonprofit organization mission? Write down a mission statement to set clear goals.
Where will you accomplish your nonprofit organization goals? What is the scope of your initiatives? Is it a local, state, or regional project? Will it create an impact internationally?
How will you accomplish your goals? What will be your fundraising plan?
2. Form a Corporation
Corporations are established at the state level; find out about the regulations of the state in which your organization will be based.
The general steps will include:
Naming the corporation: Select a unique name that reflects your nonprofit organization's mission. Check with the Secretary of State to see if it's available. Head to the US Department of Commerce website to ensure it's not trademarked.
Appointing a board of directors, ensuring:some text
One-third of the board members should be capable of fundraising on your behalf.
One-third of the board members are finance, marketing, or legal experts.
One-third of the board members are connected with the community. They must have experience and expertise in your services to the community.
Filing the articles of incorporation: Incorporate in the state you are planning to conduct your charitable activities. Filing fees may vary from state to state.
Holding a board meeting to organize the documents and bylaws: The bylaws will include internal operational regulations of your organization regarding:
Fill in and deposit Internal Revenue Service Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3)” of the IRC, and wait for the determination letter.
Here are a few quick tips for applying for your 501(c)(3) EIN:
You can apply for your EIN right after forming your nonprofit—there is no need to wait for 501(c)(3) approval! Get this done early to keep things moving.
Skip the hassle and apply directly through the IRS website. It’s quick and free, and you’ll get your EIN instantly.
Prepare your nonprofit's name, address, and mission. You’ll also need a “responsible party” (usually the founder or board member) to sign off.
Be specific when describing your nonprofit’s mission. The IRS wants to know precisely how your organization fits the charitable scope.
Applying for an EIN is free, so avoid any service that tries to charge you for the process. It’s one of the easiest things to do!
While the EIN form is simple, having your foundational details (like bylaws and board members) in place will make it even smoother.
Once you have your EIN, you’re ready with applications and bank accounts and getting closer to your nonprofit’s official journey.
4. Meet All State and Local Requirements
After a federal tax exemption, you must be tax-exempt at the state and local levels. It will help you avoid paying state corporate income tax or property tax.
You will also need some other permits and licenses to operate. Be sure to take a close look at building codes and other rules that might apply locally.
Examples of state and local requirements:
State registration: Some states require you to register your nonprofit with the state Attorney General or a similar office when you start.
Charitable solicitation registration: If you're asking for donations, many states need you to register before you start fundraising.
Sales tax exemption: If you’re eligible, you’ll need to apply to the state for sales tax exemptions on your purchases.
Local business licenses: Your nonprofit may need a local business license to operate legally, depending on where you're located.
Property tax exemption: Certain states and localities offer property tax exemptions for nonprofits, but you’ll have to apply to get them.
Employee-related taxes: If you hire staff, you’ll need to comply with local payroll tax regulations, including unemployment and worker’s compensation.
5. Maintain Your Nonprofit Status
Maintaining a nonprofit tax exempt status is a persistent process. Failing to do so can result in the revocation of your 501(c)(3) registration.
Here are some guidelines to keep the tax exempt status:
Adhere to your purpose and operational structure.
Hold regular board meetings and take notes of important matters.
Comply with the annual requirements of the Internal Revenue Service to file Form 990 or Form 990-EZ. You will report your activities, governances, assets, and expenses in these forms.
Get adequate public funding as 501(c)(3) charitable organizations are essentially for the public.
Maintain spotless financial records to be ready for a sudden audit.
Do not allow your organization to take part in any political campaigns.
Do not support nonexempt purposes or illegal acts.
Do not allow your organization's activities to influence legislation.
Avoid earning UBI through your nonprofit organization.
If you have several employees, consider a qualified retirement plan for them. These are specialized plans for nonprofit organizations and closely resemble 401k plans.
6. Collect Donations
Once your organization secures its 501(c)(3) status, developing a fundraising strategy to start raising money through charitable contributions will kickstart your mission. This may include a mix of individual donations, grants, corporate sponsorships, and fundraising events.
To streamline your fundraising efforts, consider partnering with a platform like Zeffy. This platform offers a range of tools to help nonprofits collect donations, manage events, and engage with supporters.
Start Your 501(c)(3) With Zeffy
With $2,000 in legal fees being a reality for so many nonprofits who are getting started, Zeffy set out to simplify that. We know how important every dollar is so our experts are ready to support you through the legal process at no cost.
All you’ll need to do is cover any state and IRS filing fees, and we’ll guide you through every step of securing your 501(c)(3) status. You’ll have peace of mind that everything is done right and gain time and money back for your cause.
A 501(c)(3) status means the IRS recognizes your organization as tax-exempt or charitable. Essentially, it allows you to receive tax-deductible donations for donors, and it allows you to apply for grants and certain tax exemptions. It's a major step toward gaining credibility and unlocking fundraising opportunities for your nonprofit.
To maintain your 501(c)(3) status, there are a few key rules to follow:
Charitable purpose: Your organization must operate for charitable, educational, religious, or scientific purposes.
No profit distribution: All income must go back into the organization to further its mission. That means members, directors, and officers can’t receive profit.
Political activity restrictions: You can’t engage in political campaigns or excessive lobbying.
Public support rest: Your organization must generally receive a significant portion of its support from the public, not just from a few individuals or businesses.
While "nonprofit" refers to any organization that doesn’t distribute profits to owners or members, a 501(c)(3) charity is a specific type of nonprofit that has applied for and received tax-exempt status from the IRS.
Not all nonprofits are 501(c)(3)s, but all 501(c)(3)s are nonprofits. The big difference is that 501(c)(3) organizations can offer tax deductions to donors, apply for federal grants, and receive other tax breaks that other types of nonprofits don’t get.
A 501(c)(3) charitable organization can spend on activities related to its federal income tax-exempt charitable mission. No funds or assets should be used for personal benefit, as the organization is operated primarily for public good.
The timeline for obtaining 501(c)(3) approval can vary depending on how complex your application is and the Internal Revenue Service workload. On average, the process takes 3 to 6 months from when the IRS receives your complete application.
You can use reputable online tools such as ProPublica's Nonprofit Explorer or Charity Navigator to verify if a nonprofit organization has 501(c)(3) status.
These platforms allow you to search for organizations by name and provide information about their federal income tax-exempt status, financial data, and Internal Revenue Service filings. You can easily determine if the organization is operated exclusively for charitable purposes.
Alternatively, you can search for the organization using the IRS's Tax Exempt Organization Search tool, which lists eligible organizations for tax-deductible contributions.
Organizations that are not 501(c)(3) but still may have tax-exempt status or charitable roots include:
Organizations participating in political campaign activity
501(c)(3) vs 501(c)(4): Understanding the Key Differences [2024]
Organizations with both 501(c)(3) and 501(c)(4) are both exempted from federal taxes. Learn about the differences, purpose, eligibility and more for your nonprofit!
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