Most people have heard the term 501c3 or 501(c)(3) and understand it has something to do a charitable or nonprofit organization. In Minnesota, as in other parts of the country, there are only very specific types of organizations that can obtain this designation.
To help to understand the value of becoming a 501c3 and what it can provide for an organization, let’s first take a closer look at just what this designation means.
Internal Revenue Code
The portion of the Internal Revenue Code of the United States that addresses the federal tax exemption of nonprofit organizations is 501c3. This is where the term comes from and it is specific to private foundations, public charities or private operating foundations.
In general, once an entity has 501(c)(3) status, donations are considered tax-deductible for the donor. This can vary slightly and will often depend on the specific entity as well as the amount of the donation.
Additionally, once this designation is provided states, including Minnesota, will exempt the organization from state income tax. This can include sales taxes on specific types of purchases as well as exemption from any property taxes for property owned by the nonprofit organization.
Restrictions
With the perks of earning the tax-exempt status, there are also additional restrictions. For example, a board member or members cannot use the net earnings of the organization to unfairly benefit themselves or their families.
Once this status is granted the organization is not allowed to be involved in political lobbying or endorsing or non-endorsement of any candidate in any type of election. Additionally, the nonprofit cannot make donations to a political candidate.
There are advantages in becoming a 501(c)(3), but it does take the filing of specific forms to get approval. Working with a nonprofit attorney can assist the board in ensuring all documentation is filed correctly and completely for IRS approval and then state approval.
