501 (c) (3) Organizations and the IRS: Part 1

For those of you looking to set up a 501 (c) (3) organization, there are a few things that you should know before you navigate the requirements set forth by the Internal Revenue Code.

What is a 501 (c) (3) Organization?

Commonly referred to as “charitable organizations,” a 501 (c) ()3) organization is the portion of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations, specifically those that are considered public charities, private foundations or private operating foundations.” Regulation of these organizations falls under the Department of Treasury through the IRS.

Exemption Requirements

The IRS requires that the organization must be organized and operated exclusively for exempt purposes set forth in the section of the Internal Revenue Code

Maintaining Your 501 (c) (3) status

In order to maintain your status as a tax exempt organization, you must be sure to comply in the following areas: private benefit/inurement, lobbying, political campaign activity, unrelated business income (UBI), annual reporting obligation, and operation in accord with stated exempt purpose(s).

· Private Benefit/Inurement:

o Private Benefit: The activity of the organization must be directed solely at some exempt purpose. The organization’s activities cannot serve the private interests of any individual or organization (other than the organization itself) if it is more than a negligible amount. It is the public interest that should be served with the formation and activity of a 501 (c)(3) organization.

· Inurement:

o According to the concept of inurement, there is no portion of the organization’s net earnings that may inure to the benefit of a shareholder or person who has the opportunity to influence the organization through any connections he has to it.

Check back tomorrow for Part 2, which will discuss other aspects of 501 (c)(3) organizations.

If you have any questions about such organizations and their relationship with the IRS, please contact your knowledgeable tax professional. A tax attorney can help you navigate the Internal Revenue Code and ensure that your organization is compliant.


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