Tax Exempt Status 101

Which Kind of Tax Exempt Status is Right for Your Organization?

Volunteers sort donations for a nonprofit with tax exempt status

501(c)(3) status covers most types of nonprofits, from veteran’s organizations to animal shelters. Most federally tax-exempt nonprofits fall into this category—however, you may find that the activities you’re looking to engage in are better suited for another type. While there are over 20 types of 501cs, today we’ll dig into the most common types so you can get a high-level view of potential options.

Keep in mind that a nonprofit attorney can consult on whether or not your organization may be eligible for these other types of tax-exempt organizations, or caution you on the pros and cons. Let us know if we can help you decide what type of tax exempt nonprofit suits your organization best. We’d even be happy to submit the application for you to make sure it’s done right. 

A refresher on 501c3s

Donations to 501c3 organizations are tax deductible, which is a great incentive for giving. Plus, 501c3 status reassures donors that your organization adheres to some level of transparency and accountability. This versatile designation is for charitable causes that are:

  • Religious
  • Educational
  • Charitable
  • Scientific
  • Literary
  • Testing for public safety
  • Created to foster a national or international amateur sports competition, and/or 
  • Focused on the prevention of cruelty to children or animals 

It’s worth noting that churches, synagogues, mosques, and other places of worship are automatically considered tax exempt by the IRS (as long as they meet certain requirements) without filing for recognition of 501c3 status officially. However, 501c3 status could be right for your church

501c3s you might know: Special Olympics, The Humane Society, Rise Against Hunger  

501c4 – Social Welfare Groups, Civic Leagues, Etc.

These organizations are considered “social welfare groups” and they are permitted to advocate for certain causes in ways that 501c3s cannot. Though donations to 501c4s are not tax deductible, these organizations are permitted to lobby and engage in political activities, unlike 501c3s and many other types of nonprofits. 

For example, maybe you run a 501c3 nonprofit that cleans up beaches, hosts workshops on sustainable living, and invites others to care about the planet in a tangible way. You might feel inspired to bring your advocacy to a new level by getting involved in the political sphere. If you’d like to endorse specific candidates who care about the environment, you’d want to start a 501c4 entity as well so you can engage in lobbying efforts. This way, your 501c3 can continue its beach cleanup work, while the 501c4 initiates political activity. 

There are several other important factors to consider when choosing between being a 501c3 or 501c4 (or both!), so let us know if we can help advise on those complexities. 501c4s are subject to a lot of specific regulations and you’ll want to make sure you stay compliant to protect your organization from risk and legal liability. 

501c4s you might know: AARP, National Wildlife Federation Action Fund, Stand for Children

501c6 – Business Leagues, Chambers of Commerce, Etc.

Business leagues, chambers of commerce, real estate boards, and similar organizations are generally 501c6s. These nonprofits support their businesses and members without seeking a profit, and they can engage in a limited amount of political activity (so long as this is not their primary purpose). Unlike 501c3s, donations to 501c6 organizations are not tax deductible.

For example, if you’d like to start an organization that promotes the interests of dental hygienists in your community and a membership structure appeals to you, you may be looking to start a 501c6. Since these organizations typically have a professional focus, be sure that the nonprofit’s net earnings are not routed to benefit a shareholder or individual.

Remember, the word “member” in the nonprofit context carries legal significance. A member, in the legal sense, is a person who has some sort of voting rights that are built into the corporate documents, like bylaws. You can learn more about members here and the pros and cons of running a nonprofit that has them, as this will affect the structure and governance of your organization.

501c6s you might know: American Psychological Association Services Inc., The Public Relations Society of America (PRSA), Fantasy Sports & Gaming Association

501c7 Organizations – Social and Recreational Clubs

501c7s are typically fun, community-focused organizations that are mostly funded by their members. From Filipino-American cultural associations to chess clubs, knitting circles to college sororities, the purpose of these nonprofits is to serve their own members (as opposed to the public in general). Donations to 501c7s are not tax deductible, much like their c4 and c6 counterparts.

You might be wondering why someone might start a 501c7 instead of informally meeting with friends and neighbors for a friendly game of pickleball or a bridge game. One of the biggest advantages of starting a 501c7 is the opportunity for your group to contribute funds to one common interest through an established entity. And since organizations that have tax-exempt status with the IRS must maintain a level of accountability and transparency, 501c7 status can communicate you’re a legitimate group with a committed membership. 

However, if you’re not ready to oversee the obligations that come with running a tax-exempt organization (for example, maintaining filings and IRS compliance) then there’s no shame in your model train club meeting informally in your local community center. 

501c7s you might know: New York Athletic Club, Zeta Tau Alpha Fraternity, Congressional Country Club Inc

Other Types

There are several more types of tax-exempt organizations that are less common. These include:

  • 501(c)(1) Corporations Organized under Act of Congress (including Federal Credit Unions)
  • 501c8 Fraternal Beneficiary Societies and Associations
  • 501c11 Teachers’ Retirement Fund Associations
  • 501c13 Cemetery Companies

And so many more that are even more obscure. As I said before, 501c3s are your most typical types of nonprofits, so most charitable causes will apply for 501c3 status.

If you’re looking for help with your application to the IRS for any of these entities or are interested in applying for a new designation, let us know. We’d be happy to help you find the type of tax exemption best suited for your needs. Or, if you’re still in the planning phase, check out our free resource: Everything You Need to Know About Starting A Nonprofit.

Click Here