501(c)(3) Organizations


Section 501(c)(3) is part of the Internal Revenue Code that allows nonprofit making organizations to be exempted from payment of tax. Organizations that usually benefit from this exemption are charities, private operating organizations or private organizations. This rule is regulated through the Internal Revenue Code by the U.S.Treasury Department.


Understanding Section 501(c)(3)

Section 501(c)(3) was incorporated into tax law by the IRC to evaluate the stance of nonprofit making organizations to the federal income tax. The plan was implemented as an avenue for reduced federal income tax to donors contributing to the progress of nonprofit making organizations.  The 501(c) organizations are divided into 29 forms, however, the most popular among these forms is the 501(c)(3) reserved for charity organizations.


The major purpose of tax-exemption

501(c)(3) tax-exemption status only applies to charitable organizations that are involved in activities like charitable, religion, literary, educational, prevention of cruelty to children and animals, scientific operations or activities, sponsoring amateur sports competition both local and international. The list of charitable activities rendered by the organization shows the purpose of the organization. As a result, these purposes are the major reason for tax-exemption status.


Organizations that are granted the 501(c)(3) tax-exemption status include nursing homes, schools, churches, humanitarian assistance programs like Red Cross and Salvation Army.  The aim of these organizations is to help the poor and needy, to advance religion, to help alleviate the condition of the underprivileged and sick ones, to defend the human and animal rights, to help reduce the burden of the government, fight against juvenile delinquency and so on.


Requirements For Qualification

The basic requirements for 501(c)(3) is to operate any of the above-mentioned programs. The profit made by the organization is not for shareholders or individuals but to enhance the purpose for which the organization was created.


Employees working with the organization are only entitled to the fair market value of the job with no bonus or compensation. Although the charitable organization is exempted from payment of tax, it is mandated to withhold federal income tax from the paycheck of its employees.


Employees can only be exempted if they earn less than $100 in a year. Employees of religious organizations are also exempted from federal income tax because the organization is opposed to paying medicare tax and social security.


Once a 501(c)(3) organizations change its major reason for establishment, it stands the chance to lose its tax-exemption status.

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