501(c)(3)

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501(c)(3) refers to a section of the U.S. federal income tax code concerning charitable, religious, and educational organizations.[1] Organizations that have been granted 501(c)(3) status by the Internal Revenue Service are exempt from federal income tax.[2] This exemption requires that any political activity by the charitable organization be nonpartisan in nature.[3]

The IRS has strict measures for the degree to which a 501(c)(3) can participate in political and legislative activities.[4]

Common activities

501(c)(3) organizations are commonly called charitable organizations and are classified as either private foundations or public charities. Public charities are more common; they are publicly supported through donations. Most churches, schools, hospitals and research organizations are categorized as public charities.[5] According to Guidestar.org, a 501(c)(3) directory of nonprofit groups, "Public charities are the organizations people usually think of when they hear the word charity. These nonprofits' missions range from helping the poor to easing community tensions to advancing religion, education, or science."[6]

The definition of education in use by the IRS includes schools but also encompasses a broader range of organizations and activities:[7]

“ Educational purposes under IRC 501(c)(3) are broader than presenting formal classroom instruction. This gives rise to ancillary activities such as the granting of scholarships. This also includes advocating a particular position or viewpoint resulting in some type of public dissemination, which may take the form of published literature, media presentations, or the dramatic arts.[8] ”

This definition would also include think tanks—public policy research institutions—like the Cato Institute. The Lucy Burns Institute—sponsor of Ballotpedia—is an educational 501(c)(3) organization. Other educational organizations classified as 501(c)(3) include:

A private foundation is typically funded by an individual or family. These groups usually are most involved in distributing grant money to other not-for-profit corporations. Some high-profile examples are the Bill & Melinda Gates Foundation and the Ford Foundation. Guidestar notes, "Many of these nonprofits do not accept donations. Instead, private foundations usually invest their principal funding, then distribute the income from investments for charitable purposes."[6] Many private foundations also have endowments—financial reserves in which the principal is restricted but income from the principal may be spent as normal funds.[9] Not all grantmaking nonprofit groups are private foundations, however. Some—like community foundations or the United Way—are public charities that grant money to other public charities.

Donations and disclosure

Donations to 501(c)(3) groups are tax deductible for the individual or corporation making the donation.[2] 501(c)(3) organizations are required to disclose certain information publicly:

  • The organization's tax exemption application (IRS Form 1023)
  • A portion of the organization's annual return (IRS Form 990)

However, according to the IRS: "With the exception of private foundations, an exempt organization is not required to disclose the name and address of any contributor to the organization."[10] A list of names and addresses of contributors who give over $5,000 is contained in the organization's Form 990, Schedule B. With the exception of private foundations and 527 groups, the IRS keeps the Schedule B information private. The IRS also advises organizations not to send Schedule B information to states, unless otherwise requested, because that might unintentionally make information about contributors public. In December 2014, a federal lawsuit was filed challenging the California Attorney General request that organizations turn over copies of Schedule B attachments. As of May 2015, at least five states—California, Hawaii, Kentucky, Mississippi and New York—require organizations to file an unredacted Schedule B to remain as registered charities in those states.[11][12]

The organization may choose to disclose donors, or the donor may choose to disclose that he or she donated to a 501(c)(3) organization.

Political activities

Political activities, according to the definition in use by the IRS, are defined as actions that participate in the electoral process.[4] According to the IRS, "All section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office."[13]

For the IRS, nonpartisan political activity does not mean remaining neutral on all issues. Partisanship is considered in terms of specific elected officials. A group is "nonpartisan" so long as it avoids political activities that favor or oppose a candidate or have the effect of favoring or opposing a candidate.[13]

The following activities would be restricted for a 501(c)(3):

  • Contributions to political campaign funds
  • Public statements of position on a candidate
  • Partisan voter registration
  • Partisan voter education

Political activity, such as the following, is allowed if done in an educational and nonpartisan manner:

  • Present public forums
  • Publish voter education guides
  • Conduct voter registration drives
  • Organize get-out-the-vote campaigns

Legislative activities

Legislative activities, also referred to as "lobbying," are actions designed to influence legislation.[4] Lobbying cannot be a substantial part of the activities for a 501(c)(3), but organizations can engage in limited lobbying under Subsection (h) of the code. Engaging public policy issues in an educational manner does not qualify as influencing legislation.[14]

Legislation, for the purposes of a 501(c)(3), is defined as actions by:

  • U.S. Congress
  • State legislatures
  • Local governing bodies
  • Public referendum
  • Ballot initiatives
  • Constitutional amendments

The IRS does not consider actions by executive, judicial or administrative bodies to be legislative in nature. The IRS defines restricted legislative activity as follows:[14]

“ An organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation.[8] ”

A 501(c)(3) may lose its nonprofit status "if a substantial part of its activities is attempting to influence legislation."[14] There are two tests the IRS uses to measure lobbying activity.

Substantial part test
The substantial part test involves the IRS checking a variety of elements within the 501(c)(3) to determine if the group's lobbying activity is substantial. Among the factors the IRS considers are "the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the activity."[15]

Expenditure test
An alternative measure is the expenditure test, in which the IRS caps the percentage of permissible lobbying expenditures in relation to the group's tax-exempt expenditures as a whole. The limits are as follows:[16]

If the amount of exempt purpose expenditures is: Lobbying nontaxable amount is:
≤ $500,000 20% of the exempt purpose expenditures
>$500,00 but ≤ $1,000,000 $100,000 plus 15% of the excess of exempt purpose expenditures over $500,000
> $1,000,000 but ≤ $1,500,000 $175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000
>$1,500,000 $225,000 plus 5% of the exempt purpose expenditures over $1,500,000

"Nonprofit" status

Seal of the IRS

501(c)(3) groups are sometimes referred to as "nonprofits." This can be a source of confusion, because all U.S. states allow certain corporations to register as "not-for-profit" corporations. To receive "not-for-profit" status, an organization must incorporate with an individual state and pay the filing fee.[17] 501(c)(3) status, however, refers to the organization's federal tax exempt status; this is issued separately from state-level not-for-profit status and is handled through the IRS rather than an individual state.[18] Thus, an organization may be a not-for-profit corporation under the laws of the state in which it is incorporated but not have federal 501(c)(3) status.

In addition, a "nonprofit" in some cases refers to two related corporations—a 501(c)(3) and a 501(c)(4). Under IRS tax code, it is legal to transfer funds from a 501(c)(3) to a 501(c)(4), but the restrictions on how the money is spent carry over on any such transferred funds.[19] The American Civil Liberties Union is one example of this type of organization: The ACLU Foundation is a 501(c)(3) conducting educational activities, yet the ACLU is a 501(c)(4) that primarily sponsors lobbying activities.[20]

501(c)(3) organizations on Ballotpedia

The following is a list of the ten most viewed 501(c)(3) organizations on Ballotpedia:

  1. Cato Institute
  2. American Civil Liberties Union
  3. American Civil Rights Coalition
  4. American Center for Voting Rights
  5. American Majority
  6. American Enterprise Institute
  7. American Foundation for Equal Rights
  8. Brookings Institution
  9. Texas Public Policy Foundation
  10. The Institute for Humane Studies

See also

Ballotpedia:Index of Terms

External links

Footnotes

  1. ↑ Internal Revenue Service, "Exempt Purposes - Internal Revenue Code Section 501(c)(3)," accessed January 13, 2014
  2. ↑ 2.0 2.1 Internal Revenue Service, "Life Cycle of a Public Charity/Private Foundation," accessed July 10, 2015
  3. ↑ Internal Revenue Service, "Exemption Requirements - 501(c)(3) Organizations," accessed January 13, 2014
  4. ↑ 4.0 4.1 4.2 Internal Revenue Service, "Political and Lobbying Activities," accessed July 10, 2015
  5. ↑ Nolo, "IRS Charity Classification: Private Foundation or Public Charity?" accessed July 13, 2015
  6. ↑ 6.0 6.1 Guidestar, "Just What Are Public Charities and Private Foundations, Anyway?" August 2001
  7. ↑ Internal Revenue Service, "4.76.11 Educational Organizations Other Than Schools," accessed July 13, 2015
  8. ↑ 8.0 8.1 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
  9. ↑ Nonprofit Quarterly, "Should Your Nonprofit Build an Endowment?" June 21, 2006
  10. ↑ Internal Revenue Service, "Exempt Organizations Annual Reporting Requirements," accessed July 10, 2015
  11. ↑ Guidestar, "Federal Appeals Court Affirms Mandatory Filing of Unredacted Donor List by Charities Registered for Solicitations in California," May 2015
  12. ↑ Internal Revenue Service, "Schedule B," accessed February 9, 2015
  13. ↑ 13.0 13.1 Internal Revenue Service, "The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations," accessed July 10, 2015
  14. ↑ 14.0 14.1 14.2 Internal Revenue Service, "Lobbying," accessed July 10, 2015
  15. ↑ Internal Revenue Service, "Measuring Lobbying: Substantial Part Test," accessed July 10, 2015
  16. ↑ Internal Revenue Service, "Measuring Lobbying Activity: Expenditure Test," accessed July 10, 2015
  17. ↑ Law For Change, "Forms of Organization Overview," June 2013
  18. ↑ Internal Revenue Service, "Applying for 501(c)(3) Tax-Exempt Status," accessed July 10, 2015
  19. ↑ U.S. Government Publishing Office,"Section 501 of the IRS Code," accessed March 18, 2015
  20. ↑ ProCon.org, "ACLU Structure," accessed June 19, 2015
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