If you are anything like me, your bracket is totally busted – could Purdue not have gone a little bit further?! – and it’s tax time, so you are very grateful to have a qualified professional on hand to help you through this arduous annual process.
In honor of Tax Day (April 18th), I thought we would use this newsletter to go over the wide varieties of 501(c) organization structures, what each one means and what makes each one tax exempt.
One point of clarification, though, before we start: to receive funding from private Foundations and Federal and State agencies, you need to be a 501(c)3 organization.
OK! Here we go.
501(c)(3) Charitable, Religious, and Educational Organizations
- None of the organization’s earnings can benefit any private shareholder or individual.
- It may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
- 501(c)(3) organizations must pay their employees fair market value wages.
- Section 501(c)(3) is a specific tax category for nonprofit organizations.
- Organizations that meet the requirements of Section 501(c)(3) are exempt from federal income tax.
- To receive its favorable tax treatment, the nonprofit organization must not deviate from its purpose or mission.
- Once you form a 501(c )3, you no longer own it. It automatically becomes a public organization.
- While the IRS recognizes more than 30 types of nonprofit organizations, only organizations that qualify for 501(c)(3) status can say that donations to them are tax deductible.
501(c)(4) Civic Leagues and Social Welfare Organizations
To be tax exempt, you must fit into one of these categories:
- Social welfare organizations: Civic leagues or organizations not organized for profit and operated exclusively for the promotion of social welfare.
- Local associations of employees: the membership of which is limited and the net earnings of which are devoted exclusively to charitable, educational or recreational purposes.
- Homeowners associations and volunteer fire companies may be recognized as exempt as social welfare organizations if they meet the requirements for exemption.
501(c)(5) Labor, Agricultural, Horticultural Organizations
- The net earnings of the organization may not benefit any member.
- The objects of the organization must be the betterment of conditions of those engaged in the pursuits of labor, agriculture, or horticulture; the improvement of the grade of their products; and the development of a higher degree of efficiency in their respective occupations.
- Seeking legislation relevant to the labor or agricultural organization’s programs is recognized as a permissible means of attaining its exempt purposes.
501(c)(6) Business and Professional Leagues
- This provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings benefits any private shareholder or individual.
- A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. To be exempt, a business league’s activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons.
501(c)(7) Social and Recreational Clubs
- Social clubs are exempt from federal income tax under IRC 501(a) as organizations described in IRC 501(c)(7) if they are “organized for pleasure, recreation, and other nonprofitable purposes.”
- The central purpose of social clubs is to provide benefits to members, including access to social and recreational facilities such as club houses, golf courses, and swimming pools. When such benefits are funded by members, exemption has been justified by Congress on the theory that the members will be in the same position as if they had paid for the benefits directly. The practical effect of the exemption is to allow individuals to join together to provide themselves with recreational or social opportunities on a mutual basis without further tax consequences. The individual member is in substantially the same position as if he or she had spent his or her after-tax income on pleasure or recreation without the intervening organization.
- Congress extended the unrelated business income tax to social clubs in the 1969 Tax Reform Act. In doing so, however, Congress decided that, unlike most other types of exempt organizations, which were exempted because they provide some sort of community service or public benefit, clubs should be taxed on all income derived from outside their membership, including investment income.
- This enactment in 1969 created a unique status for social clubs in that they are alone among exempt organizations taxed on passive income (dividends, rents, and interest).
501(c)(8) Fraternal Beneficiary Societies
To be tax exempt, they must:
- Have a fraternal purpose. An organization has a fraternal purpose if membership is based on a common tie or the pursuit of a common object. The organization must also have a substantial program of fraternal activities.
- Operate under the lodge system, or for the exclusive benefit of the members of a fraternal organization itself operating under the lodge system.
- Provide for insurance payments (life, health, accident) or other benefits to the members.
501(c)(9) Voluntary Employees’ Beneficiary Association
- A voluntary employees’ beneficiary association is an organization organized to pay insurance, (life, health, accident), or similar benefits to members or their dependents, or designated beneficiaries. No part of the net earnings of the association may benefit any private shareholder or individual. The organization must meet the following requirements:
- It must be a voluntary association of employees;
- Its earnings may not benefit any private individual or shareholder other than through the payment of benefits described above.
501(c)(10) Domestic Fraternal Societies, Orders, or Associations
To be tax exempt:
- It must have a fraternal purpose. An organization has a fraternal purpose if membership is based on a common tie or the pursuit of a common object. The organization must also have a substantial program of fraternal activities.
- It must operate under the lodge system.
- It must not provide for the payment of insurance (life, health, accident), or other benefits to its members. The organization may arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status.
- It must devote its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes.
- It must be a domestic organization, that is, it must be organized in the United States.
THAT WAS A LOT OF INFORMATION!
But I hope it was helpful.
Everyone tends to think of the 501(c)3 when they think of charitable organizations, but as you can see, there are many other types under IRS law. 501(c)3 organizations are especially unique in that contributions to them are also tax-exempt.
SPECIAL DAYS IN APRIL THAT YOU MIGHT NEED A GRANT FOR!
April is World Autism Awareness Month (grants for healthcare).
April is Keep America Beautiful Month (grants for planting trees and trash/recycling).
April is National Pet Month (grants for pets, sheltered and abused animals).
April 5 – National Library Worker’s Day (grants for libraries, book programs).
April 7 – World Health Day (grants for health care programs, health workers).
April 15 – World Art Day (grants for artists, art projects).
It should be a huge red flag if your organization is planning on getting more than 30% of it’s general operating expenses from grants. If you can’t keep the lights on, or run critical programs without that much or more in grant dollars, you have a problem. Foundations will not see this as a sign of a healthy organization.
How much time do you need to write a grant?
2 months would be ideal. But this is often completely unrealistic, and that is okay. The actual grant writing itself may not take that long – perhaps 2-3 weeks, including putting together figures and budget. What does take some time is the development of ideas.
Easier said than done, but try not to wait until the last minute to prepare your grants. You’ll inevitably make mistakes if you feel rushed, and you won’t have time to edit or rewrite. Sometimes if you wait until the last second (like so many others!), you may find the submittal portal is crashing because too many people are trying to use it at once. Believe me, no one, especially Federal or State funding sources, will give you an extension: even if you tell them that your dog ate your homework!
SPECIAL MONTHLY OFFER!!
In the month of April, if you secure grant writing services with Sunflower and mention the code APRILFOOL, you will receive your first hour of the grant production process FREE!
BUILDING HEALTHY FUTURES FUND
Childhood healthcare can play a major role in overall health, academic achievement, and economic stability.
The Building Healthy Futures grant program supports learning for school-age youth by improving access to quality healthcare.
This grant program supports the following focus areas:
- Health Access: Programming and advocacy efforts that ensure every child has access to needed and adequate primary, vision, dental, and hearing care.
- Mental Health: Programming that promotes protective factors around mental health risks, ensures equitable access to mental health treatment services, and supports the normalization of self-care and mental health care.
Investment decisions are made for organizations or projects with the following considerations:
- Innovative efforts to provide health support for school-age youth who have limited access.
- Connection to a health need or gap in service for school-age youth.
- Addresses a healthcare issue at a systems level.
- Thoughtful collaboration with partners to realize impact.
Award Size: $50,000 minimum for programmatic support.
Applications are accepted annually July 1st-August 1st.
Awards are announced via email by October 31st.
Eligibility and Award Requirements
- Public, tax-exempt organization as defined by Section 501(c)(3) of the Internal Revenue Code, OR working with a 501(c)(3) fiscal agent who can receive funds on your behalf.
- Must provide services to Omaha Public Schools’ students and/or their families. Services do not necessarily need to occur within Omaha Public Schools’ buildings.