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What is A Non-Profit Organization?

 A non-profit organization generally is an incorporated entity established for certain social causes, including but not limited to charitable, religious, scientific, educational, literary, etc.[1] The most commonly known non-profit organizations are 501(c)(3) organizations recognized by the IRS. However, there are many other types of non-profit organizations. For example, a child care organization under IRC § 501(k) is a non-profit organization; a farmer’s cooperative association under IRC § 521(a) is a non-profit organization.[2]

Why Apply for 501(c)(3) status?

To encourage formation of non-profit organizations, federal law grants certain benefits to non-profit organizations having 501(c)(3) status. The benefits include federal income tax exemption, reduced postal rates, eligibility to receive tax-deductible charitable contributions, and eligibility to receive federal grants. Some organizations may also be exempted from certain employment taxes. Donors also like to support 501(c)(3) organizations because their donations can be tax deductible.[3]

Who May Qualify for 501(c)(3) status?

An organization may qualify for exemption from federal income tax under section 501(c)(3) if such organization is organized and operated exclusively for one or more of these purposes:[4]

  • religious,

  • charitable,

  • scientific,

  • testing for public safety,

  • literary,

  • educational,

  • fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment), and

  • the prevention of cruelty to children or animals.
     

The most common 501(c)(3) organizations are charitable, educational, and religious. Charitable organizations conduct activities that promote: [5]

  • relief of the poor,

  • advancement of religion,

  • advancement of education or science,

  • erection or maintenance of public buildings or works,

  • lessening the government’s burdens,

  • lessening neighborhood tensions,

  • eliminating prejudice and discrimination,

  • defending human and civil rights secured by law, and

  • combating community deterioration and juvenile delinquency.
     

Educational organizations include:[6]

  • schools such as primary or secondary schools,

  • organizations that conduct public discussion programs,

  • organizations that present a course of instruction with correspondence or through television or radio,

  • museums, zoos, planetariums, symphony orchestra, or similar organizations,

  • non-profit day-care centers, and

  • youth sports organizations.
     

To qualify, the organization first must be organized as a corporation, trust, community chest, fund, articles of association, or foundation. An individual or a partnership will not qualify. [7]
 

General Requirements

  1. The organization must not use its earnings to inure to the benefit of its members, officers, or other private persons, except that the organization may provide reasonable compensation for services rendered and make payments to further the exempt purpose of the organization.[8] 
     

  2. The Articles of Incorporation must limit the organization's purposes within the purposes in section 501(c)(3).  It must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further those purposes. This requirement may be met if the purposes stated in the organizing document are limited by reference to section 501(c)(3).[9]
     

  3. The organizing document must contain a provision ensuring the assets of the organization will be permanently dedicated for an exempt purpose described in section 501(c)(3), or to the federal or state government. This means when the organization dissolves, the assets will be distributed for an exempt purpose.
     

  4. The organization will not, as a substantial part of its activities, attempt to influence legislation or participate to any extent in a political campaign for or against any candidate for public office.[10]
     

  5. The organization must file Form 1023 to receive federal income tax exempt status, unless it meets the requirement in Form 1023-EZ. Form 1023-EZ is a stream-lined application to recognize exemption under 501(c)(3), which must be filed online.[11] The IRS projects the average preparation time for Form 1023 is 189 hours.[12] [See http://www.irs.gov/pub/irs-pdf/i1023ez.pdf, p. 11 for 1023-EZ’s requirements]

 

Other Important Things to Know
 

  1. Non-profit organizations can have paid and volunteer staff, but employment taxes and federal and state workplace rules are generally the same as those imposed on for-profit organizations.

 

  • If a non-profit organization sells products or services to customers, it must separately apply for sales and property tax exempt status with the State of Nebraska.
     

  • A non-profit organization can apply for non-profit mailing permits with the United States Postal Service to obtain reduced postal rates.[13]
     

  • If you hire volunteers, be aware of the Volunteer Protection Act, which protects non-profit organization volunteers from tort claims, but does not protect the non-profit organization from such claims.


     

[1] IRC § 501(c)(3)

[2] IRC § 501(k), 521(a)

[3] IRS Publication 4220 (Rev. 7-2014)

[4] IRS Publication 557

[5] IRS Publication 4220 (Rev. 7-2014)

[6] IRS Publication 4220 (Rev. 7-2014)

[7] IRS Publication 557 (2-2015)

[8] IRS Publication 557(2-2015); see example charter terms at [8] http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Life-Cycle-of-a-Public-Charity-Sample-Organizing-Documents-Draft-A-Charter.

[9] IRS Publication 557(2-2015);

[10] IRS Publication 557(2-2015);

[11] See Form 1023-EZ Eligibility Worksheet for more detail.

[12] The Funders’ Group of Lincoln and Lancaster County, How to Create a Nonprofit Organization In Nebraska (2002)

[13] USPS publication 417