501(c)(3) Charitable Organizations

Purposes
501(c)(3) organizations operate exclusively for charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  For purposes of section 501(c)(3), 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
• Erecting or maintaining public buildings, monuments, or works
• Lessening the burdens of government
• Lessening neighborhood tensions
• Eliminating prejudice and discrimination
• Defending human and civil rights secured by law
• Combating community deterioration and juvenile delinquency

Public Charity vs. Private Foundation
Every 501(c)(3) organization is classified as either a private foundation or a public charity. Private foundations and public charities are primarily distinguished by the level of public involvement in their activities. Public charities normally receive a significant portion of their financial support from the general public or governmental units and interact more with the public. 

A private foundation is typically funded by a single person, a family, or a company. Private foundations are subject to stricter operating restrictions because they are less open to public scrutiny than public charities. They are subject to certain excise taxes for failure to comply with those restrictions.  

Private foundations are further classified between private non-operating foundations and private operating foundations. The main difference is that private operating foundations actively “operate” or conduct their own charitable programs. Because of this major difference, private operating foundations are subject to the same regulations as public charities on a few key matters, which are generally more favorable than the rules applicable to non-operating foundations.

Lobbying
Lobbying is any attempt to influence legislation, including acts, bills, resolutions, or ballot initiatives by Congress, state legislatures, local councils, or similar governing bodies.

A public charity is not permitted to engage in substantial legislative activities. If lobbying activities are substantial, a 501(c)(3) organization may fail the operational test, risk losing its tax-exempt status, and, in certain cases, be liable for excise taxes.

Like public charities, private foundations will jeopardize their 501(c)(3) status if lobbying is a substantial part of their activities. However, private foundations are subject to a significant excise tax on their lobbying expenditures, such that the excise tax generally acts as a lobbying prohibition for private foundations.  A limited exception to this lobbying prohibition, known as the “self-defense” exception, applies if the communication addresses legislation that affects the foundation’s existence, powers and duties, tax-exempt status and/or deductibility of contributions.

Political Campaign Activities
All 501(c)(3) organizations are 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.  Prohibited political campaign activities include any statements made by or on behalf of the organization in favor of or in opposition to any candidate for public office and contributions to political campaign funds.  Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of excise taxes on the organization.

Tax-Deductibility and other Characteristics 
Donations to 501(c)(3) organizations are tax-deductible, though the deductibility limits vary between public charities and private foundations (and generally are more generous for public charities). In addition, 501(c)(3) organizations are generally exempt from state income tax exemption and state sales tax exemption (although some states only grant sales tax exemption to a narrow subset of 501(c)(3) organizations).  501(c)(3) organizations are also generally eligible for the nonprofit mail rate, which provides a significant discount. 

Applying for Tax-Exempt Status
Organizations seeking 501(c)(3) tax-exempt status must file the Form 1023 or Form 1023-EZ.  Churches that meet the requirements of IRC Section 501(c)(3) are automatically considered tax-exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS, although many churches choose to apply for tax-exempt status to obtain the certainty of the IRS’s determination. A written IRS determination can also simplify applying for other benefits, like state tax exemptions.

501(c)(4) Social Welfare Organizations

Purposes
501(c)(4) organizations must be operated exclusively for the promotion of social welfare.  The tax regulations specify that an organization operates exclusively to promote social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community.

Lobbying
501(c)(4) organizations may engage in unlimited lobbying related to their exempt purposes without jeopardizing their tax-exempt status.  This ability to engage significantly in lobbying activities is a key reason many organizations choose the 501(c)(4) designation.

Political Campaign Activities
501(c)(4) organizations can engage in political campaign activities if not the organization’s primary activity. 

Tax-Deductibility and other Characteristics
Donations to a 501(c)(4) organization are not tax-deductible. In addition, the names and addresses of donors do not need to be disclosed to the IRS in its annual Form 990 filing.  By contrast, all 501(c)(3) organizations must disclose their donors to the IRS in their Form 990 filings, and information about private foundation donors is made publicly available by the IRS.  Some organizations may also choose to seek 501(c)(4) status (especially as an alternative to 501(c)(3) private foundation status) if their donors do not need the benefit of tax-deductibility of their donations, and they would benefit from the more flexible rules applicable to 501(c)(4) organizations.

Applying for Tax-Exempt Status  
Organizations seeking 501(c)(4) tax-exempt status must file the Form 8976 Notice of Intent to Operate Under Section 501(c)(4), generally within 60 days of its formation. In addition to submitting Form 8976, organizations operating as 501(c)(4) organizations may also choose to file Form 1024-A to request recognition of tax-exempt status. Submitting Form 1024-A does not relieve an organization of the requirement to submit Form 8976.

501(c)(6) Business Leagues

Purposes
501(c)(6) organizations include business leagues, chambers of commerce, real-estate boards, and boards of trade.  A business league, which is perhaps the most common type of 501(c)(6) organization, is an association of persons having a common business interest, the purpose of which is to promote such common business interest and not to engage in a regular business of a kind ordinarily carried on for profit. Business leagues include trade associations and professional associations. To be considered exempt, a business league’s activities must be devoted to improving the business conditions of one or more lines of business as distinguished from performing particular services for individuals. 

Lobbying
501(c)(6) organizations may conduct unlimited lobbying to further their exempt purposes without jeopardizing their tax-exempt status.  An organization that engages in these activities must give its members notice of amounts of membership dues allocable to nondeductible lobbying expenditures; failure to provide such notice may subject the organization to a proxy tax on the amount of the expenditures.

Political Campaign Activities
501(c)(6) organizations are permitted to engage in political campaign activities if they are not the organization’s primary activity.

Tax-Deductibility and other Characteristics
Donations to a 501(c)(6) organization are not tax-deductible. 

Applying for Tax–Exempt Status
Organizations seeking 501(c)(6) tax-exempt status must file the Form 1024 with the IRS. 

Keep in mind that organizations engaging in lobbying and political campaign activities may also be subject to federal, state, and, in some cases, local lobbying registration and disclosure reports, depending on relevant factors, including the amount spent on the activities, whether lobbyists are retained, and the locations of such activities.  

Choosing the Classification of Your Organization

It is critical to correctly determine which tax-exempt status is most appropriate based on your organization’s key objectives.  Failure to apply for and obtain the correct tax-exempt status may subject an organization to unanticipated regulatory burdens and constraints and leave it unable to accomplish its essential goals.  While seeking reclassification of an organization’s tax-exempt status is possible, it can be a slow and complex process. As such, it is best to apply for the most strategically beneficial tax-exempt status from the outset.

The post Three Key Types of Federal Tax-Exempt Status[br] 501(c)(3), 501(c)(4), and 501(c)(6) appeared first on Perlman & Perlman.

What is the solicitation of funds for charitable purposes?

Charitable fundraising is the act of asking for a gift, which may be in the form of cash or non-cash items, to benefit a charitable organization or charitable purpose. Although there is no standard definition of charitable purpose among the states that regulate charitable fundraising activities, it typically encompasses benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare, advocacy, public health, environmental conservation, civic, or other charitable objectives.

It’s important to understand that the act of soliciting (i.e., asking for a gift) triggers the applicable regulations. Solicitations can occur in any form where a request is made for a gift to support a charitable organization or purpose. Examples include, but are not limited to telephone, face-to-face interaction, websites, online platforms, emails, direct mail, tickets for fundraising events, purchase of goods to benefit a charitable organization, raffles, bingo, sweepstakes, auctions, television or radio ads, and social media.

Who is subject to the charitable solicitation rules?

The “persons” (which can include an individual, organization, trust, foundation, group, association, entity, partnership, corporation, society, or any combination thereof) soliciting charitable contributions can generally be classified into four types: charitable organizations, professional fundraisers, professional fundraising counsels, and commercial co-venturers.

Charitable Organizations
A charitable organization is one that is established for a charitable purpose. Whether an organization has tax-exempt status or may receive tax-deductible contributions is a completely separate question from whether it is considered to be a charitable organization under state law. So, although “charitable organizations” certainly include 501(c)(3) tax-exempt organizations recognized as charitable by the IRS, it may also include other Section 501(c) organizations, other nonprofit organizations defined by state law, or, in some states, even for-profit entities. In essence, the important consideration is whether an organization engages in the solicitation of contributions to support a charitable purpose.

In some states, depending on the amount of total contributions or the nature of their activities, charities such as religious or educational institutions, hospitals, and membership organizations may be exempt from registration. Additionally, organizations that solely solicit via the Internet (and do not engage in any targeted activity directed to any state) may not be required to register in any state—other than in the state in which they are domiciled.

There are forty-one states plus the District of Columbia that mandate charitable organizations to register if they want to request donations from residents. The registration involves submitting a state registration form, providing a copy of the organization’s IRS Form 990 (if applicable), financial statements (which may need to be audited, depending on the organization’s annual revenue), copies of contracts with fundraisers and commercial co-venturers, and a filing fee. Additional documentation that might be required during the initial registration process includes a copy of the organization’s charter, bylaws, and IRS determination letter (if the organization qualifies for tax-exempt status).

Professional Fundraisers
A professional fundraiser (PFR), also known as a professional solicitor, paid solicitor, or commercial fundraiser, is a hired individual or firm that solicits contributions on behalf of a charitable organization in exchange for compensation. They may also have custody and control over the contributions received and play a role in managing fundraising campaigns. Professional fundraisers can include telemarketers, door-to-door solicitors, and others who solicit donations in person.

In forty-three states, PFRs are required to register, post a surety bond, file contracts with their nonprofit clients, and submit campaign financial reports. Additionally, many states require professional fundraisers to disclose their status as a paid solicitor before requesting a contribution.

Professional Fundraising Counsels
A professional fundraising counsel (FRC) is a paid entity that provides planning, consultation, advice, and design of solicitation materials on behalf of a charitable organization. They do not directly make solicitations. Generally, if an FRC is compensated based on a percentage of the funds raised or has control of contributions, it will be considered a PFR. Examples of FRCs include strategic consultants, direct mail consultants, and fundraising event planners.

Currently, thirty states require FRCs to register and file contracts. Some states also require them to post bonds and file campaign financial reports.

Commercial Co-venturers
A commercial co-venturer (CCV) is a for-profit entity that doesn’t typically raise funds but instead promotes that the purchase or use of its goods or services will support a charitable organization or charitable purpose. A typical example of a CCV is a retail store that pledges to donate a percentage of the purchase price or a specific amount per unit sold to a charitable organization.

Currently, up to seven states require some combination of registration, contract filing, posting of a bond, and/or filing of a campaign financial report. Additionally, around twenty other states regulate this activity by mandating specific contract terms or point-of-sale disclosures but do not require registration or contract filing by the CCV. Some states also require the charitable organization benefiting from the CCV promotion to file and/or report the CCV contract.

What about Internet solicitations?

Most state statutes require registration for internet solicitations that reach residents of the state. However, for a state to impose its regulations on an entity’s online solicitation activities, the entity must have “minimum contacts” with that state. States recognize that enforcing registration requirements for every internet solicitation is nearly impossible. In 2001, the National Association of State Charity Officials (NASCO) issued guidelines called the Charleston Principles. These principles are not binding laws, but NASCO encourages state charity regulators to use them as practical guidelines for applying their state laws to online fundraising activities.

The principles apply to any of the regulated entities that solicit contributions via the Internet (i.e., charities, PFRs, FRCs, and CCVs) and summarize the application of state registration and reporting regimes as follows:

Entities domiciled in a state are those whose main place of business is in the state. According to the Principles, having a physical presence in the state, like a branch or regional office, can also indicate state jurisdiction. 

Out-of-state entities that engage in non-internet activities requiring registration in the state (e.g., direct mail or inbound telephone solicitation) fall under state jurisdiction.

Out-of-state entities that solicit through an interactive or non-interactive website and either (a) specifically target individuals in the state or (b) receive regular contributions from the state on a ‘repeated and ongoing’  or ‘substantial” basis by the website solicitation.

The definition of ‘repeated and ongoing’ or ‘substantial’ contributions is left to individual states by the Principles. Currently, Colorado, Mississippi, and Tennessee have formally adopted numerical thresholds by regulation. In Colorado, an entity is considered to have received ‘repeated and ongoing’ or ‘substantial’ contributions if it gets at least fifty online contributions, or the lesser of $25,000 or 1% of its total contributions, in online contributions during a fiscal year. In Mississippi, an entity receives ‘repeated and ongoing’ or ‘substantial’ contributions if it receives at least twenty-five contributions or $25,000 in online contributions in a year. In Tennessee, an entity receives ‘repeated and ongoing or ‘substantial’ contributions if it receives at least one hundred contributions or $25,000 in online contributions in a year.

What are the disclosures that need to be made at the point of solicitation?

Some states require organizations to include specific disclosure statements on all written materials when soliciting donations. These disclosures must include information about how to obtain additional details about the organization and provide contact information for certain states. The requirements apply to charitable organizations and professional fundraisers. 

The disclosure notice should be included on all printed solicitations, as well as written confirmations, receipts, and contribution reminders. Examples of printed solicitations typically include direct mail, fliers, or newsletter solicitations. However, written solicitations can also include emails or requests for donations on an organization’s website, such as a donate button or a link to donate.

Despite seeming burdensome, these disclosures can guide potential donors to a specific representative within the organization or to the organization’s website for more information.

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