Nonprofits, charities and private foundations

An organization can be treated as a nonprofit — without obtaining a determination from the IRS —  if it has gross receipts in each taxable year of normally not more than $5,000. It must meet the other requirements for IRC section 501(c)(3) status and it cannot be a private foundation.

Contributions to these “mini nonprofits” are tax deductible. Although there is no requirement to do so, some mini nonprofits seek IRS recognition because recognition assures contributors that contributions are deductible.

All charities are nonprofits, not all nonprofits are charities.

(A) What’s a “nonprofit”?

To be a nonprofit, an organization must fit within one of 34 different Internal Revenue Code (IRC) categories — based on its function or mission. Most organizations have to apply to the IRS for a written determination that they are entitled to nonprofit status. Churches and government agencies don’t have to apply.

Being a nonprofit means that the organization can operate without paying income taxes to Uncle Sam on their main activities Because of this, nonprofits are often referred to as being “tax-exempt.”

Being a nonprofit does not mean that you can claim a charitable contribution deduction for money you give to the organization. For 22 of the 34 nonprofit categories, there is no charitable contribution deduction. IRS Publication 557 lays this out in great detail on pages 72 and 73.

The five largest nonprofit categories account for more than 91% of the total registered with the IRS.

• Section 501(c)(3) — 71.3% of all nonprofits — religious, educational, charitable, scientific, literary, public safety, amateur sports, prevention of cruelty to children or animals. Charitable contribution deduction is available.
• Section 501(c)(4) — 7.1% — Civic leagues, social welfare organizations. NO charitable contribution deduction.
• Section 501(c)(8) — 4.9% — Fraternal benefit societies. Charitable contribution deduction available if for certain 501(c)(3) purposes.
• Section 501(c)(6) — 4.6% — Business leagues, chambers of commerce. NO charitable contribution deduction.
• Section 501(c)(5) — 3.6% — Labor, agricultural, horticultural organizations. NO charitable contribution deduction.
• Section 501(c)(7) — 3.6% — Social and recreational clubs. NO charitable contribution deduction.
• Section 501(c)(19) — 2.2% — Post or organization of armed forces veterans. NO charitable contribution deduction.

The IRC also makes an important distinction within the section 501(c)(3) category — public charities vs. foundations. The distinction is based on where the organization’s financial support comes from (with private foundation support typically coming from a small group of large donors).

(B) What’s a “charity”?

For us (and most others) a charity is

• a nonprofit that qualifies under section 501(c)(3) and
• is also a public charity (vs. a private foundation).

Generally you can claim a charitable contribution deduction for a donation to a 501(c)(3) public charity. You can also claim the deduction for donations to some nonprofits which are not 501(c)(3) organizations, at times depending on the intended use of the donation. See IRS Publication 557 at pages 72 and 73.

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