In an article published on October 12, 2020 in Bloomberg Tax, James Standard provides insight on the basic considerations which must be addressed in forming and operating a 501(c)(3) organization, primarily from a federal income tax perspective.
Section 501(c)(3) provides that corporations and certain other types of entities which are ‘‘organized and operated exclusively’’ for certain enumerated purposes are exempt from paying federal income tax. As an initial matter, an organization must be organized exclusively for one or more tax-exempt purposes in order to enjoy tax-exempt status. “This is generally the least problematic requirement to meet, and is largely a procedural matter,” explains Standard.
Throughout the article, Standard addresses the following:
- The Operation Requirement – Whichever of the specifically-enumerated statutory purposes for which an organization is formed, it must be organized and operated to serve ‘‘a public rather than private interest’’ in order to be entitled to tax exempt status.
- The Prohibition on Inurement – Section 501(c)(3) provides that ‘‘no part of the net earnings of’’ a 501(c)(3) organization may ‘‘inure to the benefit of any private shareholder or individual.’’ This prohibition against inurement is the fundamental distinguishing feature between ‘‘non-profit’’ corporations and ‘‘for-profit’’ corporations.
- Limitation on Lobbying Activities – Unless a 501(h) election is made, ‘‘no substantial part’’ of an organization’s activities may consist of ‘‘propaganda, or otherwise attempting, to influence legislation,’’ i.e., lobbying.
- Prohibition on Political Campaign Activities – A 501(c)(3) organization may not participate or intervene in any political campaign on behalf or, or in opposition to, any candidate for public office.
- Categories of Tax-Exempt Purposes – Section 501(c)(3) sets forth several purposes for which an organization may organized and operated in order to qualify for tax-exempt status.
“Section 501(c)(3) organizations provide those involved in their operation the opportunity to promote a variety of causes that serve the interests of the public at large, as well as more narrowly-tailored interests,” said Standard. “However, as should be apparent from the foregoing discussion, it is of critical importance that those involved in their operation be cognizant of the myriad rules governing these organizations’ tax-exempt status. Careful and ongoing planning is therefore critical to ensure that such organizations are able to continue to enjoy their special status and pursue their mission.”