Everything You Need to Know About 501(c)(3) Nonprofits
We may be partial, but nonprofits are our absolute favorite. They are the hard workers in the background helping those in need, doing the important work to improve our community and planet. You probably know that already, though. But do you know what impact they might have on your taxes? Do you know the different types of nonprofits? Maybe not. Not to fear – Millie is here to help you learn the need-to-know basics when it comes to different types of nonprofits, charitable donations to those organizations, and what it might mean for your personal finances or your company’s.
Quick disclaimer first – this is not financial advice, but rather a quick overview of important concepts. When it comes to you and your company’s finances, always be sure to consult an accountant or financial advisor.
So… There’s More Than One Type of Nonprofit?
Yep! You’ve likely heard of 501(c)(3) nonprofits before. Most of the charities you know and love are probably designated as 501(c)(3) nonprofit organizations by the Internal Revenue Service, AKA the IRS. Some examples are Strides for Peace, which aims to end gun violence in Chicago, or the Atlantic White Shark Conservancy, which promotes shark research and education.
But did you know there are actually 28 different 501(c) nonprofit designations, ranging from veterans organizations to fraternal associations and tons of other types of both public and private foundations. All of these nonprofit organization types have slightly different rules and purposes, but there are a few important ones to note since you’ll encounter them frequently and they have key differences for tax purposes, even though they are all tax-exempt organizations.
We already mentioned 501(c)(3) nonprofits, which are the ones you’ve likely encountered the most. These can range from religious organizations to scientific ones, from sports leagues to educational foundations, and more. The common threads between 501(c)(3) nonprofits is that they tend to conduct research and are able to receive charitable contributions, which are tax-deductible (don’t worry, we’ll get to what that means later). Notably, 501(c)(3)s are extremely limited in their ability to lobby and they cannot endorse political candidates. In order to qualify as a 501(c)(3) nonprofit organization, they must abide by these stipulations.
You probably know that there are a lot of politically active nonprofits, though. These tend to qualify as 501(c)(4) nonprofits, another common organization type. Examples include civic leagues, social welfare organizations, and employee associations. One well-known 501(c)(4) you might have heard of is the American Civil Liberties Union, or ACLU, which focuses on civil rights in the US. They are a very politically active group, since 501(c)(4) groups are able to take part in more advocacy and lobbying and can even endorse politicians. Other than politics, a key difference is that charitable donations to 501(c)(4) nonprofits are not tax-deductible – again, more on what that means soon!
You may also hear about 509(a)(3) organizations from time to time. This is another type of exempt organization, but these are supporting organizations that are not a charity themselves but qualify for exempt status through their support and services to other tax-exempt organizations, such as 501(c)(3) nonprofits.
The other 26 tax-exempt, nonprofit 501(c) organizations all differ slightly in their purposes, qualifications, designations, and charitable donations, such as whether donations are tax-deductible or not. Most of these organizations are pretty specific, such as Black Lung Benefit Trusts for coal miners’ healthcare costs, or teachers’ retirement fund associations for educators. The most important differences for you and your company to consider have to do with taxes.
Tax-Exempt or Tax-Deductible? Or Both?
There are a lot of common buzzwords when it comes to taxes, which is daunting. Luckily, you don’t have to be an accountant to figure them out. When discussing nonprofits, you’ll probably hear the phrases “tax-exempt” and “tax-deductible” thrown around a lot. These might sound similar, but they have different meanings for you and your company’s donations.
Tax-exempt refers to the tax status of a nonprofit itself. Tax-exempt organizations, such as those designated as 501(c)s per IRS tax code, are exempt from paying federal income tax and other certain state taxes. Like all companies, they have annual filing requirements, in part to make sure they are following the guidelines that allow them to qualify as tax-exempt.
In the context of charitable donations to a nonprofit, tax-deductible refers to the way that certain donations are able to be deducted from you or your company’s taxable income on a tax return, lowering your tax liability. In other words, by donating to charity, you pay less taxes! That’s a win-win in our book, and it probably is for your company, too.
So, what do you need to do about all this? The most important thing is to keep a record of each charitable donation that either you or your company makes with the donation amount, date, and organization name – this is the information you will need when you indicate a deduction for your tax return. When filing your taxes, you can opt for either a standard deduction or an itemized deduction. Itemized deductions consider each item you spent money on, including but not limited to charitable donations, local sales taxes, and property taxes. Standard deductions are based on information like your income and whether or not you are claiming dependents. There are multiple factors to consider when deciding how to go about your deductions. If you want to know more, the IRS details both options here.
Finally, it’s important to remember that while all 501(c) nonprofits are tax-exempt organizations, not all of them allow for tax-deductible donations. For example, many 501(c)s don’t even accept contributions, which means that they cannot offer tax deductions since there are no contributions to deduct in the first place.
P.S.: Remember that this is not financial advice, but just an overview of what these common buzzwords and concepts mean. Taxes are anything but simple, and it’s important to always consult an accountant or financial advisor when it comes to financial decisions.
How Do Nonprofits File?
Just because 501(c) nonprofits are tax-exempt doesn’t mean they have no tax responsibilities – they still have to complete an annual filing with the IRS just like other companies. First, they have to actually gain tax-exempt status. To apply for recognition of tax-exemption, organizations have to file Form 1024 and can then be granted 501(c) status. To be granted 501(c)(3) status, however, nonprofits must file Form 1023.
Once a company has been granted 501(c) tax-exempt status, most are required to fill out Form 990 or some version of it. There are a few key differences to know when it comes to different types of 990s:
- Organizations whose gross receipts amount to over $200,000 must fill out Form 990.
- Organizations whose gross receipts amount to between $50,000 and $200,000 must fill out Form 990-EZ.
- Organizations whose gross receipts amount to less than $50,000 must electronically fill out Form 990-N.
- Certain organizations have special 990 forms. For example, private foundations fill out Form 990-PF, and Black Lung Benefit Trusts fill out Form 990-BL.
The big takeaway here is that there is a lot of variance when it comes to nonprofits and taxes, whether that has to do with the tax status of a nonprofit, your company’s tax deductions, the forms nonprofits fill out during annual filing, and more. The IRS website is a great resource for the nitty-gritty of it all, such as who fills out what form or how to itemize deductions, but hopefully this quick guide provided some guidance when it comes to those buzzwords we’ve all been confused about from time to time.
With your new nonprofit and tax knowledge in hand, it’s time to get giving – and don’t forget to deduct once you do! 😉
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