501(c) exemptions tend to be a bit misunderstood, and too often you'll hear people wondering how political groups, or organizations like the NFL, are give tax-exempt status. The problem is that, when most people think about tax-exempt organizations, they are picturing corporations that have filed for 501(c)3 status.
501(c)3 entities typically have charitable, educational, or religious missions, and don't turn a profit and create a non-political public good, thus any donations are tax-deductible. A 501(c)3 exemption is also the most popular type tax exemption - 74% of all 501(c)s are 501(c)3. However, there are twenty-eight other types 501(c) eligible groups, and only two can solicit donations as tax-deductible.
If you're planning on forming a non-profit, it's important to know about the different types of tax-exempt organizations. Some 501(c) groups are a little obscure, but below is a list of the five most common types available.
501(c)4: Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
A 501(c)4 exemption is the most popular type after the 501(c)3. Groups that qualify for a 501(c)4 exemption are supposed to promote social welfare, so normally organizations like volunteer fire stations or Rotary Clubs will be the entities that seek out a 501(c)4 exemption.
501(c)4's, however, get a bad reputation because they are technically allowed to lobby for the furtherance of whatever social mission they embody. As not everyone agrees on what benefits society, some 501(c)4 organizations are seen as a political problem. But, don't write this exemption off completely. A lot of (c)4 groups still do good work. Some donations to (c)4's are tax-deductible, and others are not. Normally, a c(4) has to disclose that information whenever it solicits donations.
501(c)5: Labor, Agricultural and Horticultural Organizations
Labor and agricultural unions will typically seek out a 501(c)5 exemption. There aren't many active unions registered with the IRS, but famous labor organizations like Unite Here, the UAW, and the Teamsters all have 501(c)5 exemptions.
Though some people disagree with giving organized labor groups tax-exempt status, as they are occasionally believed to have political agendas, the reasoning behind the decision is that these groups spend member dues to help better the lives of the laborers and farmers they represent. Donations, or dues paid, are also typically deductible, but as a business or trade expense rather than a charitable contribution.
501(c)6: Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
501(c)6 is another slightly controversial tax-exempt status, since the organizations that would qualify for a c(6) represent businesses that do turn a profit. A 501(c)6-qualified group is typically an association or league of business owners that have united for a common purpose, like furthering the interests of their members within the local community- or giving business owners a united voice with which to affect change.
The NFL, which has been under fire for having tax-exempt status, is a 501(c)6. But, as with (c)5 organizations, and dues paid or donations given to a (c)6 will not qualify as tax-deductible, charitable contributions.
501(c)7: Social and Recreational Clubs
There are only a few hundred 501(c)7 groups registered with the IRS. To qualify, the entity has to be created solely for recreation or other social purposes, so you'll often see country clubs with a 501(c)7 status. Though these entities do collect dues, any money coming in has to be used in the best interest of the club's members. And, since no profit is generated, there is nothing to tax.
501(c)8: Fraternal Beneficiary Societies and Associations
Just like with (c)7's, 501(c)8-qualified groups are sustained by member fees and donations. Interestingly, the only fraternal societies that qualify for (c)8 deductions are those that operate with a lodge or chapter system. They also need to prove they offer a system of support, like discounted insurance or death benefits, for their members and their members' immediate family. Fraternal societies that use a lodge system, yet don't offer these benefits, can still qualify for tax-exempt status, but they have to apply for a 501(c)10 exemption, and devote their earnings to charitable causes.
The one uniting factor for all tax-exempt, 501(c)-qualified entities, however, is the fact that the IRS will keep a very close eye on any tax-exempt group and its finances. If you are considering forming a non-profit entity, it's a good idea to talk your options over with an attorney or another professional. Though a 501(c)3 exemption is the most popular, remember that it may not be right for your non-profit. Finding the right 501(c) will make compliance much easier, and you won't have to worry about losing your tax-exempt status.
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