The Internal Revenue Code (IRC) of the United States’ 501(c) designation grants nonprofit organizations tax-exempt status. It specifies specifically which nonprofits are excluded from paying federal income tax.
The purpose of the tax break provided by the government is to support organizations that function only for the benefit of the public and to encourage their presence. Charities, governmental agencies, advocacy groups, educational and artistic associations, and religious institutions are examples of common tax-exempt organizations.
What is a 501(c)?
There are several provisions under subsection 501(c) that distinguish the various categories of tax-exempt organizations based on their goals and methods of operation.
The most typical ones are:
- 501(c)(1): Any corporation that is 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): Non Profit 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.
Additional 501(c) Organization Types
Over time, the scope of the 501(c) designation has grown to include more categories of organizations. Other organizations that might be eligible for listing under this classification include:
- Fraternal beneficiary organizations that work with a lodge structure and provide members and dependents benefits for things like death, illness, and other circumstances
- Associations for teacher retirement funds, provided they are regional in scope and none of their net earnings increase for the advantage of a single private shareholder.
- Local charitable life insurance organizations
- A few joint cooperative phone and electric firms
- Cooperative, nonprofit health insurance
- Cemetery organizations that are solely owned and run for the benefit of its members or that are not profit-driven
- Other than life insurance firms, credit unions without capital stock organized Insurers with gross receipts of less than $600,000
- A variety of trusts for objectives like enhancing pensions and unemployment benefits
- Organizations whose members are current or former members of the US military forces, or their spouses, widows, children, or auxiliary groups supporting them
What Does “501(c) Organization” Mean?
The 501(c) designation denotes a nonprofit organization that cares about delivering a public benefit and is exempt from paying federal income taxes. Organizations with the 501(c) status include charities, governmental agencies, advocacy groups, teams in the arts and education, and institutions of religion.
What Sets a 501(c)(3) Apart from a 501(c) Organization?
The Internal Revenue Code has two different tax classifications: 501(c) and 501(c)(3). Both are tax-exempt nonprofit entities under federal law. A 501(c)(3) organization, which includes nonprofits, churches, and private foundations, may, nevertheless, inform its contributors that they can deduct their contributions from their taxes.
Unlike most corporations, which are founded primarily to generate a profit, organizations that are established solely to serve the public play a vital role in society. Because these organizations lessen the cost on the state and enhance the quality of life for the populace, the U.S. government grants them 501(c) designations and tax-exempt status.
And we’re not only talking about charitable organizations here. Several credit unions and insurance companies are among the numerous 501(c) nonprofit entities that the IRS recognizes.