Applying for Tax Exemption FAQs

Back to Frequently Asked Questions

The terms “nonprofit,” “not-for-profit” and “nonstock” describe the way an organization incorporates under state law. These terms all describe organizations that are not organized to make a profit, and that typically do not issue stock.

The term “tax exempt” refers to the status granted by the IRS to qualifying organizations. To receive tax-exempt status, an organization must meet a specific description and, for Section 501(c)(3) status, complete and submit an application. Tax-exempt status under Section 501(c)(3) applies to federal income tax and federal unemployment tax. States also grant tax exemption, but the process and types of exemption vary from state to state.

The term “charitable” refers to a type of organization that is recognized as tax exempt under Section 501(c)(3) of the Code. Organizations exempt under Section 501(c)(3), which also include religious and educational organizations, receive certain benefits not conferred on other tax-exempt organizations. For example, contributions to them are tax deductible by the donor.

For more information, review the Applying for Section 501(c)(3) Status course.

All Section 501(c) organizations, including 501(c)(3), describe particular types of organizations that qualify for tax exempt status. Section 170 provides that contributions to certain types of organizations - primarily 501(c)(3)s and a few others - are deductible by the donor as itemized deductions. Section 501(c)(3) governs the tax-exempt status of organizations, while Section 170 governs deductibility of contributions by individuals.

If an organization files its application for recognition as a tax-exempt organization within 27 months of the date of its incorporation or formal organization, then tax-exempt status, if granted, will be effective as of the date of its incorporation or other formation date.

If an organization files for exemption after 27 months from the date of incorporation or formation date, then tax-exempt status, if granted, will be effective from the postmarked date of the application for tax-exempt status.

For more information, review the Applying for Section 501(c)(3) Status course.

All Section 501(c)(3) organizations have what is called a “foundation classification.” The terms “public charity” and “private foundation” are ways of referring to an organization’s foundation classification. Because of the way the law is written, any organization that qualifies for tax-exempt status under Section 501(c)(3) is presumed to be a private foundation, unless it can show that it qualifies for one of the exceptions to private foundation status. Any organization qualifying for such an exception is sometimes called a public charity.

Some types of organizations, such as churches and schools, are defined as public charities by operation of law. But most organizations qualifying for public charity status do so because they can show that their financial support comes from a broad cross-section of the public. Organizations that receive their support from a very narrow base or that were set up by a wealthy individual or family will typically be classified as private foundations.

Although both types of organizations are tax exempt under Section 501(c)(3), private foundations are subject to certain excise taxes and reporting requirements that do not apply to public charities.

For more information, review the Applying for Section 501(c)(3) Status course.

Your organization must comply with the normal annual return filing requirements during your first five years of existence, including Form 990-N, unless you are otherwise not required to file a return. However, you will still be a public charity regardless of the public support information reported in the Schedule A to your annual return.

For more information, review the Applying for Section 501(c)(3) Status course.

Private benefit occurs when an individual or organization receives a benefit - monetary or nonmonetary - from a Section 501(c)(3) organization. A tax-exempt organization that provides a substantial amount of private benefit may risk losing its tax-exempt status. (This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.)

For more information, review the Applying for Section 501(c)(3) Status course.

Inurement occurs when an “insider” of an exempt organization receives any of an organization’s net income or inappropriately uses any of its assets for personal gain. An insider is a person who has a personal and private interest in the activities of an organization. Examples are officers, directors and key employees. Any amount of inurement, no matter how small, can jeopardize an organization’s tax-exempt status. This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.

For more information, review the Applying for Section 501(c)(3) Status course.

Inurement deals specifically with insiders, while private benefit can be to both insiders and outsiders. Both terms describe situations in which an exempt organization’s income or assets are inappropriately diverted for private gain rather than used for a public purpose.

For more information, review the Applying for Section 501(c)(3) Status course.

Lobbying is defined as “the attempt to influence legislation.” Legislation includes actions by Congress or any state legislature, local council or other similar governing body. Actions by these bodies include acts, bills, or resolutions. If an exempt organization contacts or urges the public to contact a member or employee of a governing body in order to advocate for or against an action by the body, it is lobbying.

For more information, review the Applying for Section 501(c)(3) Status and the Political Campaigns and Charities courses.

If a Section 501(c)(3) organization conducts substantial lobbying, it risks losing its tax-exempt status. Loss of exemption would result in the organization’s income becoming subject to income tax. In addition, taxes may apply to the organization and to managers who knew that the lobbying expenditures were excessive.

For more information, review the Applying for Section 501(c)(3) Status and the Political Campaigns and Charities courses.

The IRS uses one of the following two methods to determine whether the lobbying activities of a 501(c)(3) are substantial:

  • The “substantial part test”
  • The “expenditure test”

The first test is a subjective test based on the facts and circumstances. The IRS considers a variety of factors, including the time devoted to the lobbying activity by both compensated and volunteer workers as well as the money spent on it. If the activity as a whole is determined to be substantial, the organization’s exempt status may be jeopardized.

The second test is an objective, mathematical test that applies a dollar limit for lobbying expenditures based on the organization’s total expenditures. As long as the organization’s total annual lobbying expenditures are under this limit, its lobbying is considered insubstantial. An organization must elect to have its lobbying activities measured by this test by filing Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation. This election, governed by Section 501(h) of the Code, must be made during the tax year for which it is to be effective.

For more information, review the Applying for Section 501(c)(3) Status and the Political Campaigns and Charities courses.

Back to Frequently Asked Questions