It’s a simple question for grant seekers in the US:
What is your organization’s tax status?
I saw this on an application recently and thought, “Well, that’s easy.” I clicked the dropdown box to select 501(c)(3). This is what I found:
Then I thought,
I know the organization is a 501c3 but...I have never actually verified a subcategory for the client - there are SEVEN OF THEM!
After calling and clarifying (which took two phone calls and three emails), I fell into a rabbit hole because I realized I didn’t actually KNOW the definition of each of these categories - certainly not off the top of my head.
I mean, I kinda knew. But I didn’t really know.
Now I do. Here's a list of all the 501(c) statuses. For more detail on the most common ones, keep scrolling:
Disclosure: The following comes from information from the IRS and other sites retrieved in August 2021. I’ve included the links.
I am NOT an accountant. I am NOT an attorney. The IRS may update their guidelines the day after I post this. There are probably a million loopholes through and around these requirements. If you have questions or concerns about your own status, please consult someone with expertise in tax status regulations.
Here is a simplified version of the MOST COMMON TYPES of nonprofit designations. Keep scrolling for more detail:
501c3: Charitable Organization. To be tax-exempt under section 501c3 of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501c3 and none of its earning may inure to any private shareholder or individual. In addition, it may not be an action organization.
Dana’s plain English interpretation: Your organization has to exist to make the world a better place - not just to make money. Any “profit” after expenses must go back into the mission; not be paid to owners. Also, you can’t exist to influence legislation or campaign for political candidates.
501c3 - 509a1: Organizations that receive at least one-third of its total support from public support. An organization that fails to meet the One-Third Support Test can alternatively qualify as a public charity under 509(a)(1)/170(b)(1)(A)(vi) if (a) it has a public support ratio of 10% or more; (b) the organization is organized and operated so as to attract new and additional public or governmental support; and (c) the facts and circumstances indicate it is a publicly supported organization through the Five Factor Analysis Test, which includes: 1) public support over 10%; 2) Sources of support; 3) Representative Governing Body (see related blog post); 4) Availability of Public Facilities or Service; Public Participation in Program or Policies; 5) Additional factors.
Dana’s plain English: It’s a legit nonprofit that gets most of its operating revenues from donations - not fees for service - and doesn’t have investments that pay dividends. Like a free clinic that doesn’t have an endowment.
501c3 - 509a2: These are publicly supported organizations that receive more than one-third of their financial support from contributions, membership fees and gross receipts from activities related to their exempt functions, and no more than one third of their financial support from gross investment income.
Dana’s plain English: It’s a legit nonprofit but they get money from programming (like a sliding-scale clinic) and/or from investments (like an endowment).
501c3 - 509a3: A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities. A supporting organization generally warrants public charity status because it has a relationship with its supported organization sufficient to ensure that the supported organization is effectively supervising or paying particular attention to the operations of the supporting organization.
Dana: It’s a nonprofit that exists only to support another nonprofit.
There are different types of 509(a)(3) organizations!
Type I: A supporting organization generally warrants public charity status because it has a relationship with its supported organization sufficient to ensure that the supported organization is effectively supervising or paying particular attention to the operations of the supporting organization.
Like a parent/child relationship.
Type II: A Type II supporting organization must be supervised or controlled in connection with its supported organization(s), typically by having a majority of the directors or trustees of the supported organization(s) serve as a majority of the trustees or directors of the supporting organization.
Like a sibling relationship
Type III: a Type III supporting organization is not subject to the same level of control by its supported organization(s). Therefore, in addition to a notification requirement, Type III supporting organizations must pass separate responsiveness and integral part tests. There are two types of Type III organizations:
Non Functionally integrated
Look it up if you need to know more about Type III. Seriously.
501c2: A corporation organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from taxes.
So let’s say someone donates a piece of land to a nonprofit. The nonprofit isn’t sure that the land isn’t a liability so, to protect the organization, they create a separate entity to be the owner.
501c4: Social Welfare Organizations. To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). They are allowed to lobby as a primary activity but they cannot support political candidates.
Dana: Like an organization created to support the rights of tenants in a specific community.
The net earnings of the organization may not inure to the benefit of any member; and
The objects of the organization must be the betterment of conditions of those engaged in the pursuits of labor, agriculture, or horticulture, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations.
Dana: Like a professional association.
501c6: Provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues.
Chambers of commerce and PROFESSIONAL FOOTBALL LEAGUES. Yeah, there was no lobbying involved there.
Organizations may also be referred to as:
Private Foundation: All 501c3 organizations are ASSUMED to be a private foundation UNLESS they specify that they are something else.
Fiscal sponsor: Using a fiscal sponsorship arrangement offers a way for a cause to attract donors even when it is not yet recognized as tax-exempt under Internal Revenue Code Section 501(c)(3).
This week's book recommendation:
The Nonprofit's Tax Guide (affiliate code below)