The Magic Number: 501(c)(3)

You may have seen the number 501(c)(3) and wondered, "What does that really mean?"

All of the charities featured on this blog are 501(c) nonprofit agencies, which means that donations to them are tax deductible (you can claim them on your tax return). There are many types of 501(c) nonprofits, ranging from 501(c)(1) (corporations organized under act of congress) to 501(c)(28) (National Railroad Retirement Investment Trust). Most of the charities profiled on this blog are neatly categorized as 501(c)(3) nonprofit organizations.

The 501(c)(3) category denotes that the organization is based on religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition, or prevention of cruelty to children or animals.

501(c)(3) status means that the nonprofit has been incorporated and certified with the IRS as tax-exempt, in other words, the organization does not pay taxes on the contributions it receives from the general public. Furthermore, the 501(c)(3) status also means that the nonprofit has filed a recent 990 or 990-N with the IRS, an annual filing much like your 1040 or 1040-EZ. In 2010, the IRS decided that any organization that didn't file its 990 or 990-N would lose their 501(c)(3) status. (You should have seen how many emails and phone calls I got about this. No worries: BIAD files its 990 annually without fail.) 501(c)(3) status also requires a certain level of compliance with government regulations, including proper acceptance of contributions and documentation thereof. These nonprofits are also limited in their ability to lobby government officials, as well as limiting their support of one political candidate or another. The challenge for nonprofits is to maintain its good standing with the community, its consumers, and the IRS.

For nonprofits, the 501(c)(3) status is a validation for its corporate sponsorships, foundations, and other sources of funding. Effectively, 501(c)(3) status is much like a key that opens many doors. Without this IRS determination, it would be fairly difficult for a nonprofit to conduct business at its fullest capacity. Usually, unless I can prove my charity's nonprofit status, I can't even fill out an application for funding.

More information on charity tax-exemptions can be found at http://www.irs.gov/charities/content/0,,id=125361,00.html.