What is a 501(c)?
– A “501(c)” refers to a part of the U.S. Internal Revenue Code (IRC) that lists types of nonprofit organizations that may be exempt from federal income tax. It does not automatically grant tax-exempt status; an organization must meet the IRS’s rules and, in many cases, apply for recognition.
Key definitions
– Tax-exempt organization: an entity that does not pay federal income tax on income related to its exempt purpose.
– 501(c)(3): the most familiar subcategory covering charitable organizations, churches and other religious entities, and private foundations. Donors to many 501(c)(3) organizations can deduct eligible contributions on their federal tax returns.
– Adjusted gross income (AGI): the taxpayer’s gross income after certain adjustments; many charitable deduction limits are expressed as a percentage of AGI.
Types of 501(c) organizations (brief)
– The 501(c) section includes many different designations, each tied to a particular mission (charitable, educational, social welfare, trade associations, credit unions, etc.). Each subsection (for example, 501(c)(3), 501(c)(4), 501(c)(6), etc.) has distinct rules about activities, political involvement, and donor deductibility.
501(c)(3) in more detail
– Who fits: public charities (general-purpose charities), churches/religious organizations, and private foundations.
– Donor benefit: contributions to qualifying 501(c)(3) organizations are often tax-deductible for donors who itemize. The organization should be able to tell donors whether a gift is deductible and, if a donor receives goods or services in return (a “quid pro quo” benefit), what portion is nondeductible.
How donations and deductibility typically work (rules summarized)
– Many charitable contribution deductions are limited by percentages of the donor’s AGI. Common limits cited:
– Up to 60% of AGI for certain cash gifts to public charities (check current IRS guidance for updates).
– Up to 50% of AGI for many other types of gifts.
– Up to 30% of AGI for gifts to certain other organizations or for certain types of property.
– These are general ceilings; actual deductibility depends on gift type, recipient classification, and changes in tax law.
Worked numeric example (simple)
– Facts: Taxpayer’s AGI = $80,000; taxpayer gives $1,500 in cash to a qualifying 501(c)(3) public charity and also buys a museum membership that costs $100, where the membership includes a $50 fair-market-value benefit (admission/gifts).
– Cash gift to 501(c)(3): $1,500 is well under typical cash ceilings (e.g., 60% × $80,000 = $48,000) so the full $1,500 is generally deductible if the taxpayer itemizes.
– Membership purchase: $100 paid; $50 is the value of the benefit, so deductible portion = $100 − $50 = $50 (again only if the organization is a qualifying deductibility-status charity and the taxpayer itemizes).
– Note: This example illustrates arithmetic only. Actual allowable deductions depend on the organization’s confirmed status and current tax rules.
Practical checklist — for donors and nonprofits
– If you’re a donor:
1. Confirm the organization’s tax-exempt status (use the IRS Exempt Organization search).
2. Ask whether your gift is to a 501(c)(3) and whether any benefit was received (get a written receipt showing deductible amount).
3. Keep records: bank records, receipts, or written acknowledgments for all deductible donations.
4. When preparing taxes, apply the relevant AGI limits and consult up-to-date IRS rules.
– If you’re starting or running a nonprofit:
1. Identify the correct 501(c) subsection for your mission.
2. Prepare and file the required application (e.g., Form 1023 or Form 1023-EZ for many 501(c)(3) groups) if you want formal recognition.
3. Maintain compliance: file annual information returns (Form 990 series) if required, keep minutes and financial records, and follow activity restrictions tied to your 501(c) type.
4. Inform donors about deductibility and provide proper receipts.
How to verify status and apply
– Verify an organization’s exempt status using the IRS Tax Exempt Organization Search.
– To obtain recognition as a 501(c)(3), many organizations file Form 1023 (Application for Recognition of Exemption). The IRS’s Publication 557 explains exemption rules and filing requirements and lists compliance obligations.
Bottom line
– “501(c)” is a section of the U.S. tax code that lists categories of nonprofit entities that may be exempt from federal income tax. 501(c)(3) is the subgroup most donors recognize because gifts to qualifying 501(c)(3)s are often tax-deductible. Status is not automatic: organizations must meet IRS criteria and usually must apply and maintain compliance to keep their exemption.
Selected official sources
– Internal Revenue Service — Publication 557, Tax-Exempt Status for Your Organization
https://www.irs.gov/publications/p557
– Internal Revenue Service — Exemption Requirements — Section 501(c)(3) Organizations
https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-section-501c3-organizations
– Internal Revenue Service — Application for Recognition of Exemption (Form 1023)
https://www.irs.gov/forms-pubs/about-form-1023
– Internal Revenue Service — Tax Exempt Organization Search
https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
– U.S. Government Publishing Office — Title 26, Internal Revenue Code
https://www.govinfo.gov/app/collection/uscode/2020/title26
Educational disclaimer
This explainer is for general informational and educational purposes only. It is not personalized tax, legal, or investment advice. For guidance specific to your situation, consult a qualified tax professional or the IRS.