Confusion is common when dealing with the many Internal Revenue Service codes and regulations. Section 501(a) defines rules for tax-exempt entities. Organizations that fall under that definition are then categorized into 29 groups in Section 501(c), with charities, religious organizations and educational organizations falling under 501(c)(3). Groups like labor unions and political organizations fall into other sub-sections of 501(c). In other words, Section 501(c)(3) is just one of the categories of tax-exempt groups covered by Section 501(a).
Basic Tax-Exempt Status
A business with tax-exempt status under Section 501(a) meets the requirements for exemption as stated in IRS Code 170: Charitable, etc., donations and gifts. Many types of business entities and organizations qualify for this status and are defined in the 501(c) sub-sections. Individuals and for-profit organizations can make tax-deductible donations to entities that meet 501(a) status.
Obtaining tax-exempt status requires first establishing the entity. For example, a non-profit needs to establish a corporation with the appropriate Secretary of State before applying for tax-exempt status. The exempt entity must file annual tax returns with Form 8976 Notice of Intent to Operate. Compliance must be met annually with changes noted based on audits or termination.
Identify the Exempt Organization Type
IRS Code Section 501(c)(3) refers to charitable organizations, religious and educational organizations. Public charities as well as private foundations are eligible, though most view tax-exempt entities as public charities. An example of a public charity is Susan G. Komen supporting breast cancer awareness. An example of a foundation is the Bill and Melinda Gates Foundation. The difference between these two is the method by which money flows in. A public charity seeks funds through broad fundraising and donation campaigns while a foundation is held privately and usually funded by a single source.
Other Types of Tax-Exempt Entities
Section 501(c) covers 29 sub-sections or organizations that qualify for tax-exempt status. People get donation requests most often from 501(c)(3) entities, but might not realize how many tax-exempt organizations they actually interact with. Local city councils fall under 501(c)(3) exempt status, while labor unions, credit unions, political organizations are all examples of other 501(c) entities not categorized in sub-section 501(c)(3). For example, the local chamber of commerce isn't a 501(c)(3) but rather, a 501(c)(6).
This is a small distinction since both entities receive the same tax-exempt status. However, there are minute differences in the operating requirements and in how funds must be collected and dispersed. For example, a local chamber of commerce might not directly collect money for the benefit of a stated mission since the chamber usually serves as an advocacy organization together with local city and state government bodies to improve the local business environment.
This is in stark contrast to the rules of a charity that must disburse funds to achieve the mission of the charity. For example, the Wounded Warriors Project takes donated funds, less operating expenses, and helps wounded warriors and their families with various levels of care, rehabilitation and home modifications.