Navigating the United States of America’s Internal Revenue Services is an intimidating task. There are countless bad jokes and tax simplifying applications to anecdotally evidence the average citizens’ discomfort with our tax codes. Unfortunately understanding the tax code and how it can benefit you or a new company your starting can be one of the best ways to grow as a new business. One of the simplest starting points when determining your tax status is to decide if your organization is for profit, not for profit, or more importantly not for profit and also charitable. Charitable organizations can access IRS code 501(c)(3), a ruling which provides these organizations with a tax exemption.
The definition for “charitable” is fairly broad and includes religious institutions, educational institutions, charitable institutions, scientific institutions, literary institutions, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children. If you want to start a non-profit business that maintains and sustains public land, congratulations you may have a 501(c)(3) on your hand. If you want to start a non-profit business The vast majority of organizations like these are often non-profit corporations, but LLC’s, community chests, and unincorporated associations can be included in 501(c)(3) status. What makes 501(c)(3) status particularly intriguing the tax-deductibility of donations. “26 U.S.C. § 170, provides a deduction, for federal income tax purposes, for donors who make charitable contributions to most types of 501(c)(3) organizations”. Traditionally, charities are the primary types of 501(c)(3) organizations.
Public charities are most commonly associated with 501(c)(3) code. More often than not public charities receive a majority of funding from either the general public or the government, and needs at least 1/3rd of its revenue must be from “a fairly broad base of public support”. A donation to a public charity allows for individual tax-deductibility of up to 60% of the donors; income, with corporate limits set at 10%. The ruling structure of a public charity has to be made up of independent and unrelated individuals.
The moniker “charitable” presents as the primary difference between non-profit organizations that obtain 501(c)(3) status and non-profit organizations that don’t. Not all non-profit organizations are charitable in the eyes of the IRS. The governments’ notion of “charity” remains linked to the traditional definition of a service providing a public good. Further not all non-profit organizations need to file for 501(c)(3) status, especially if they are smaller in scale. Most non-profits can access state exemptions to income and sales tax making the need to access a federal exemption minimal.