Many nonprofit organizations avoid paying certain taxes by obtaining 501(c)(3) status with the IRS.
When a nonprofit organization receives 501(c)(3) status that refers to the section of the IRS tax code that grants tax-exempt status. The term 501(c)(3) broadly covers nonprofit organizations, meaning organizations that do not inure---or financially benefit---any private shareholders. The IRS also sets other requirements for 501(c)(3) status, such as organizations may not work to advance political or private interests.
Eligible Nonprofits
The IRS declares the following types of nonprofit organizations as 501(c)(3) eligible: "charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals."
Excess Benefits
If a 501(c)(3) nonprofit completes a transaction and receives payment or another type of benefit beyond reason, the IRS could intervene by using methods such as imposing an excise tax on the transaction.
Lobbying
Many 501(c)(3) organizations work toward objectives that governmental policy could affect, under the tax-exemption, nonprofits are not allowed to dedicate the majority of their activities toward lobbying.
Other Exemptions
A nonprofit organization that doesn't classify as a 501(c)(3) could receive tax-exempt status from the IRS under another part of section 501(c). Other qualifying nonprofit organizations can include social clubs, employee benefit associations and veterans organizations.
Applications
Nonprofit organizations seeking 501(c) tax exempt status can begin their search on the IRS website. The federal agency provides a question and answer section that can help organizations determine if they qualify for an exemption, and if so, what kind.
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