<aside> What’s this about? Some nonprofits are exempt from certain taxes. For example, 501(c)(3) and 501(c)(4) charities are exempt from federal income tax.

What do I need to do? If you’ve decided to set up a nonprofit, determine the appropriate type. Then, establish relevant tax exemptions — by filing to use the appropriate tax code, via the IRS website.

Contents

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Regulator guidance

• IRS: The Concept of Charity
• IRS: Requirements for exemption: Social welfare orgs
• IRS: Governance and Related Topics - 501(c)(3) Organizations

Databases

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What’s a nonprofit?

Legally, a nonprofit organization is an entity formed and operated for purposes other than generating profit.

A nonprofit has measures in place to keep it socially responsible. It is a type of corporation that is not organized for the benefit of shareholders. Being a nonprofit or exempt entity is a state-level concept.

What’s a 501(c)X?

A 501(c)X is a federal tax designation that can be applied for an received by state nonprofit organizations.

The most common 501(c)X structure is 501(c)3. These organizations have more specific requirements they must follow:

• Structure: The organization must have charitable purposes; and if it dissolves, assets must be given to another qualified public charity with a similar mission.
• Operations: The organization must operate within the charitable mission, and follow additional tax requirements.
• Lobbying: Lobbying must be limited, and private foundations must not award grants to a public charity that has activities that involve influencing legislation.
• Election activity: The organization must not engage in any election activity (besides non-partisan get-out-the-vote efforts)
• Private benefit: The organization must not provide private benefit to insiders or outsiders, except for a “charitable class” — a sufficiently large or indefinite group that benefits from a grant.

Here are some pros and cons associated with turning your nonprofit into a 501(c)3:

| Pros of a charity | ✅ Exemption from federal income tax ✅ Tax-deductible donations for your donors ✅ Encourages public trust | | --- | --- | | Cons of a charity | ❌ Must have a charitable purpose and act exclusively under that purpose ❌ Campaign and lobbying restrictions ❌ Increased filing and reporting requirements which are often open to the public ❌ Application process can be difficult and time-consuming |

Nonprofits can also take the structure of a fiscal sponsorship; see Explore fiscal sponsorship for more information on finding a new fiscal sponsor.

Another common 501(c)X status that an organization might choose is to be a 501(c)4 — 501(c)4s can do unlimited lobbying, but donations to them are not tax deductible.