IRS Exemption Requirements
Charities & Non-Profits
To be tax-exempt as an organization described in IRC Section § 501(c)(3) of the Code, an organization must be organized and operated exclusively for one or more of the purposes set forth in IRC Section 501(c)(3) and none of the earnings of the organization may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities and it may not participate at all in campaign activity for or against political candidates.
The organizations described in IRC Section 501(c)(3) are commonly referred to under the general heading of “charitable organizations.” Organizations described in IRC Section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with IRC Section 170.
The exempt purposes set forth in IRC Section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening the burdens of government; lessening of neighborhood tensions; elimination of prejudice and discrimination; defense of human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
To be organized exclusively for a charitable purpose, the organization must be a corporation, community chest, fund, or foundation. A charitable trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify. The articles of organization must limit the organization’s purposes to one or more of the exempt purposes set forth in IRC Section 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that are not in furtherance of one or more of those purposes. This requirement may be met if the purposes stated in the articles of organization are limited in some way by reference to IRC Section 501(c)(3). In addition, assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the federal government or to a state or local government for a public purpose. To establish that an organization’s assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision insuring their distribution for an exempt purpose in the event of dissolution. Although reliance may be placed upon state law to establish permanent dedication of assets for exempt purposes, an organization’s application can be processed by the IRS more rapidly if its articles of organization include a provision insuring permanent dedication of assets for exempt purposes. For examples of provisions that meet these requirements, download Publication 557, Tax-Exempt Status for Your Organization.
An organization will be regarded as “operated exclusively” for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of the exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. For more information concerning types of charitable organizations and their activities, download Publication 557.
The organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of an IRC Section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any managers agreeing to the transaction.
An IRC Section 501(c)(3) organization may not engage in carrying on propaganda, or otherwise attempting, to influence legislation as a substantial part of its activities. Whether an organization has attempted to influence legislation as a substantial part of its activities is determined based upon all relevant facts and circumstances. However, most IRC Section 501(c)(3) organizations may use Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, to make an election under IRC Section 501(h) to be subject to an objectively measured expenditure test with respect to lobbying activities rather than the less precise “substantial activity” test. Electing organizations are subject to tax on lobbying activities that exceed a specified percentage of their exempt function expenditures. For further information regarding lobbying activities by charities, download Lobbying Issues.
For purposes of IRC Section 501(c)(3), legislative activities and political activities are two different things, and are subject to two different sets of rules. The latter is an absolute bar. An IRC Section 501(c)(3) organization may not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Whether an organization is engaging in prohibited political campaign activity depends upon all the facts and circumstances in each case. For example, organizations may sponsor debates or forums to educate voters. But if the forum or debate shows a preference for or against a certain candidate, it becomes a prohibited activity. The motivation of an organization is not relevant in determining whether the political campaign prohibition has been violated. Activities that encourage people to vote for or against a particular candidate, even on the basis of non-partisan criteria, violate the political campaign prohibition of IRC Section 501(c)(3). See the FY-2002 CPE topic entitled Election Year Issues for further information regarding political activities of charities.
IRS Main Page for Charities and Non-Profits
IRS Publication on Charitable Contributions
For property that you have held long-term (longer than twelve months) as a capital asset, you may generally deduct its full fair market value, as determined by a qualified appraisal (up to 30% AGI and five-year carryover), provided that MoMA’s use of the property is related to its charitable mission. An example of related use is when you donate modern or contemporary artwork that the Museum accepts for its collection. If MoMA’s use is unrelated (e.g., if you donate an antique rug or artwork not accepted for MoMA’s collection) or if the property was held for twelve months or less, then your deduction is limited to your cost basis. Note that for works donated by the artist, the income tax charitable deduction may be limited to the actual cost of materials. moma.org/
- Items Valued at under $20,000. The Office of Art Appraisal Services is also available toprovide telephoneassistance to examiners in determining the FMV of many objects of art that have return values of less than $20,000. Examinersare encouraged to take advantage of this expert advice for such items as paintings, watercolors, prints, lithographs, etchings, drawings and sculptures. The valuation specialists in Art Appraisal Servicesmay be reached at (202) 401-4124. However,prior to making a telephone call to discuss the value of any item, the examiner shouldascertain as many as possible of the following:
- Name of artist
- Description of item including: the medium, title, size, date created, and any distinguished marks, symbols or labels
- Date acquired by taxpayer
- Valuation date
- Cost of acquisition
- Claimed FMV
Tax on unrelated Business Income of Exempt Organizations
Offer in Compromise
The IRS provides on-line training for tax-exempt organizations at StayExempt.irs.gov. The site includes a virtual workshop – web-based version of the popular Exempt Organization workshops – and a number of mini-courses on topics of interest to tax-exempt organizations. If you are an educator in need of Virtual Workshop testing material, please contact us.