Paying It Forward the Right Way: 501(c)(3) Organizations
In 2012 and 2013, our country endured the effects of Superstorm Sandy, record snow storms in Kansas and Missouri, and the tornadoes in Moore, Oklahoma. When these events occur, Americans show their patriotism by assisting in relief efforts on the ground or through charitable organizations such as the American Red Cross. Closely-held business owners and entrepreneurs provide significant support and resources not only in times of natural disasters but throughout the course of the year. The core missions of these generous donors may vary from providing the necessary educational tools for school children in underprivileged neighborhoods or supplying relief efforts to victims of natural disasters; however, the goal of “paying it forward” is their primary interest.
For most philanthropical closely-held business owners and entrepreneurs, Internal Revenue Code (“IRC”) 501(c)(3) provides the primary tax vehicle for their various social and humanitarian endeavors. In order to qualify under 501(c)(3), an organization must be established and organized for the benefits of the public, such as relief of the poor, lessening of government burdens, or the erection or maintenance of public buildings, etc. The charitable organization must be a corporation, foundation, or fund, and cannot be an individual. The organization must expressly limit their activity to the exempt purposes set forth in section 501(c)(3). IRC section 501(c)(3) organizations must be always organized and operated exclusively for religious, charitable, scientific, literary, educational, or prevention of cruelty to children and animal purposes. Charitable organizations are eligible to receive tax-deductible contributions from individuals and corporations via IRC section 170. These contributions allow the charitable organization to function and provide services, and it provides individuals and corporations a tax-deduction.
Qualifying charitable organizations are exempt from income tax, but they are required to file an annual return Form 990 (Return of Organization Exempt from Income Tax) if their gross receipts exceed $25,000, although those with revenue under $25,000 may be required to file an annual electronic notice Form 990-N. Timely filing is required, and charitable organizations may be required to pay penalties for late filings. Further, charitable organizations with unrelated business income are required to pay income tax on that aspect of their business by filing Form 990-T.
Charitable organizations must adhere to certain caveats and restrictions to maintain their status in addition to the filing requirements. Charitable organizations will not be regarded as an IRC section 501(c)(3) organization if substantial aspects of its activities do not further an exempt purpose. The organization cannot be established for the benefit of private interests or individuals, and the earnings or profits may not benefit individuals or persons controlled directly or indirectly by private interest. An excise tax may be imposed on the organization if there is an excess benefit transaction to an individual with significant authority over the organization. Charitable organizations are also limited in the amount of political and legislative activity they conduct such as lobbying. This is extremely important given the recent scrutiny of political activity involving IRC §501(c)(4) and various contributions to political campaigns and political advertising.
IRC §501(c)(4) provides exemption of two types of organizations: 1) Social welfare organizations: Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, and 2) Local associations of employees, the membership of which is limited to the employees of designated person(s) in a particular municipality, and the net earnings of which are devoted exclusively for the promotion of social welfare. Homeowners associations and volunteer fire companies may be recognized as exempt as social welfare organizations if they meet the requirements for exemption. Organizations that engage in substantial lobbying and political activities sometimes also are classified as social welfare organizations, but only if those activities are not the organization’s primary activity.
