This Intentional Giving series aims to help readers become more informed and confident philanthropists by knowing how to assess and identify mission-aligned organizations. Our previous issue discussed giving mission statements — what is it, why it's important, and how to write one. If you missed it, be sure to check it out on our blog!
In this post, we explore another important factor for philanthropists to consider when deciding which organization(s) to support: the 501(c) (3) status.
Those who have been involved with nonprofits have likely at least heard this term before, but may not be sure what it actually means or why it matters. We want all philanthropists to have the knowledge they need to make the best decisions for their charitable goals — so let’s go through it together!
One of the first things people typically check for when assessing an organization is whether it is recognized as a 501(c)(3) nonprofit by the Internal Revenue Service (IRS). But what does this mean, and why does it matter?
501(c)(3) refers to the section of the US Internal Revenue Code that allows federal tax exemption for qualifying nonprofit organizations. This is the primary nonprofit status through which donations made to the organization are tax-deductible. This provides an opportunity for donors to financially support a nonprofit while also lowering their own taxable income.
To qualify, organizations must operate exclusively for a charitable purpose, including religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, preventing cruelty to children or animals, or another generally charitable purpose. 501(c)(3) organizations may not operate to support private interests (e.g., generating financial benefits for a creator or shareholder) and any profit earned must be used strictly for charitable purposes. 501(c)(3) organizations also have strict rules for their activities and governance. For example, they are strictly prohibited from endorsing or intervening in political campaigns, and limited in their ability to engage in activities like lobbying.
501(c)(3) organizations may be structured as public charities or private foundations. Public charities typically receive their funding from a range of sources like the general public, governmental agencies, corporations, private foundations, or other public charities. They typically engage in direct services, but may also participate in grant-making in furtherance of their charitable mission. Donors to public charities get the benefit of deducting their cash contributions from their gross income. On the other hand, private foundations are typically funded by a smaller group of individuals and sources, like family members or even a corporation. They often engage in grant-making activities that further their charitable mission, but could still conduct direct charitable activities. Donors can still receive a tax advantage by supporting private foundations, but the percentage of eligible tax-deductibility is less than for donations to public charities.
The specific type of 501(c)(3) classification largely depends on the specific goals of the nonprofit organization and how it plans to fund its activities. Each have their own obligations related to how the organization is funded, the activities it is permitted to engage in, governance, tax advantages for donors, and more. For more information related to tax exempt status and applicable regulations, be sure to rely on trusted sources like the IRS website — or ask us for help!
While a 501(c) (3) designation confirms the nonprofit’s tax-exempt status — and presumably its compliance with the regulations applicable to operating a public charity or private foundation — this status alone doesn’t necessarily provide a full picture of the organization’s management or effectiveness. There are many factors that help philanthropists make informed decisions about which organizations to support, including this tax exempted status.
Keep following along with our Intentional Giving blog series to learn more tips!
If you’re ready to take the next step in your giving, be sure to schedule a free consultation. We’ll help you define your charitable goals and values, create curated lists of aligned nonprofits, and develop a personalized giving plan to follow for impactful giving. We can’t wait to hear from you!