In recognition of the important work performed by nonprofit organizations, federal and state/local laws provide tax exemption to qualifying nonprofits.
Nonprofit organizations include everything from neighborhood associations to large charitable and educational organizations and foundations. If established and operated according to requirements of the Internal Revenue Code section 501(c), they can qualify as tax-exempt. The system of tax exemption helps sustain the rich work of nonprofit enterprises, which has been a distinguishing feature of this country since the 19th century.
Section 501(c)(3) and other paragraphs
The most prominent of tax-exempt organizations are those qualifying as exempt under Internal Revenue Code section 501(c)(3). Typically labeled charitable and educational nonprofits, contributions to organizations recognized by the IRS as 501(c)(3) organizations may be tax-deductible to donors. Section 501(c)(3) organizations may be divided into “public charities” and “private foundations,” the latter deriving much of their support from a small number of sources and from investment income. Private foundations are subject to a greater operating restrictions and to excise taxes for failure to comply with those restrictions. Restrictions and excise taxes also apply to the maintenance and operation by section 501(c)(3) organizations of “donor advised funds,” which provide donors advisory privileges with respect to the distribution or investment of the funds.
There are other paragraphs of IRC section 501(c)(3) which provide tax exemption, although generally not the possibility of tax-deductible contributions. For example, section 501(c)(4) describes civic leagues and other organizations operated exclusively for the promotion of social welfare. Section 501(c)(4) does not itself define the term “social welfare,” but according to regulations, a social welfare organization “must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).” Section 501(c)(6) describes business leagues/chambers of commerce and other organizations formed and operated for the primary purpose of serving its members.
Organizations claiming qualification under section 501(c)(3) generally must file an application for recognition on IRS Form 1023 describing among other things its purposes and activities, whereas for recognition as tax exempt under section 501(c)(4) or 501(c)(6), an application is not mandatory but may be made on IRS Form 1024. Annual reports are generally required to be filed on IRS Form 990. For organizations claiming tax exemption under section 501(c)(4), newly issued rules generally require the filing of a Form 8976 (notice of intent to operate under section 501(c)(4) within 60 days of organization.
Of course, different rules and additional considerations apply to foreign nonprofit organizations which operate in or derive income from the U.S.