501(c)(3)

501(c)(3) exemptions apply to corporations, and any community chest, fund, cooperating association or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, promote the arts, or for the prevention of cruelty to children or animals.^[7][8]
Another provision, 26 U.S.C. § 170, provides a deduction, for federal income tax purposes, for some donors who make charitable contributions to most types of 501(c)(3) organizations, among others. Regulations specify which such deductions must be verifiable to be allowed (e.g., receipts for donations over $250). Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging to a charity's continued operation, as many foundations and corporate matching programs do not grant funds to a charity without such status, and individual donors often do not donate to such a charity due to the unavailability of the deduction.
Testing for public safety is described under section 509(a)(4) of the code, which makes the organization a public charity and not a private foundation,^[9] but contributions to 509(a)(4) organizations are not deductible by the donor for federal income, estate, or gift tax purposes.
The two exempt classifications of 501(c)(3) organizations are as follows:^[10]
A public charity, identified by the Internal Revenue Service (IRS) as "not a private foundation," normally receives a substantial part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections 509(a)(1) through 509(a)(4).
A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to make grants to other organizations, rather than being dispersed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations, which do not qualify as public charities.
Before donating to a 501(c)(3) organization, a donor may wish to review IRS Publication 78, which lists organizations currently exempt under 501(c)(3).^[11]

Obtaining status

Most organizations acquire 501(c)(3) tax exemption by filing IRS Form 1023. The form must be accompanied by a $850 filing fee if the gross receipts for the organization are expected to average $10,000 or more.^[12][13] If gross receipts are expected to average less than $10,000, the filing fee is reduced to $400.^[12][13] There are some classes of organizations that automatically are treated as tax exempt under 501(c)(3), without the need to file Form 1023:

• Churches, their integrated auxiliaries, and conventions or associations of churches^[14]
• Organizations that are not private foundations and that have gross receipts that normally are not more than $5,000^[15]

The IRS also expects to release a software tool called Cyber Assistant in 2011, which will assist with preparation of the application for tax exemption.

Political activity

Main article: Nonpartisan (American organizations)

Section 501(c)(3) organizations are subject to limits or absolute prohibitions on engaging in political activities.

Elections

Organizations described in section 501(c)(3) are prohibited from conducting political campaign activities to intervene in elections to public office.^[16] The Internal Revenue Service website elaborates upon this prohibition as follows:
"Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.
"Certain activities or expenditures may not be prohibited depending on the facts and circumstances. For example, certain voter education activities (including presenting public forums and publishing voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner.
On the other hand, voter education or registration activities with evidence of bias that (a) favor one candidate over another, (b) oppose a candidate in some manner, or (c) favor a candidate or group of candidates, constitutes prohibited participation or intervention. The Internal Revenue Service provides resources to exempt organizations and the public to help them understand the prohibition. As part of its examination program, the IRS also monitors whether organizations are complying with the prohibition.

Lobbying

In contrast to the absolute prohibition on political campaign interventions by all section 501(c)(3) organizations, public charities (but not private foundations) may conduct a limited amount of lobbying to influence legislation. Although the law states that "No substantial part..." of a public charity's activities can go to lobbying, charities with large budgets may lawfully expend a million dollars (under the "expenditure" test), or more (under the "substantial part" test) per year on lobbying.^[17] To clarify the standard of the "substantial part" test, Congress enacted §501 (h) (called the Conable election after its author Representative Barber Conable). The section establishes limits based on operating budget that a charity can use to determine if it meets the substantial test. This changes the prohibition against direct intervention in partisan contests only for lobbying. The organization is now presumed in compliance with the substantiality test if they work within the limits. The Conable Election requires a charity to file a declaration with the IRS and file a functional distribution of funds spreadsheet with their Form 990. IRS form 5768^[18] is required to make the Conable election.