Federal & State Government Regulations for 501(c)(3) Organizations

Organizing a charitable or social service group can bring you up close and personal with federal law, which allows a tax exemption for qualified organizations that apply for 501(c)(3) status with the IRS. The basic IRS rules on the exemption involve the purpose and activities of the group; state laws require registration of such groups and an additional application for a tax exemption.

The IRS requires 501(c)(3) groups to be organized for "exempt purposes," which can be charitable, educational, literary or scientific. The tax code also allows an exemption for the prevention of cruelty to children or animals or the fostering of amateur sports. A group dedicated to improving public safety, fighting discrimination or juvenile delinquency, protecting public monuments or repairing damaged housing may also qualify. Proceeds from these activities may not benefit any individual member or shareholder -- the group must have a public, not private purpose.

Under the IRS rules, a 501(c)(3) must be organized as a trust, association or corporation and must file Form 1023, Application for Recognition of Exemption. This exhausting 26-page (with schedules) form asks questions on organization, location, activities, purposes and finances, as well as more specific details on groups organized for religious, educational, medical, scientific and other purposes. As of the date of publication, the user fee to submit with the application is $750 if gross receipts are $10,000 or more a year; $300 for annual gross receipts of less than $10,000. Following approval, the group must file an annual Form 990, 990-EZ or 990-N (the "e-postcard") to report receipts and expenses.

States have their own guidelines and laws on tax-exempt organizations -- 501(c)(3) is a federal designation and has no standing in state law. -- In Washington, for example, non-profits must complete a Business License Application and select "Non-Profit" in Section 3 for business structure. In addition, the state requires registration with the Charities Division of the Secretary of State's office. Finally, an application for the tax exemption is necessary, to be filed with the Washington Department of Revenue. Check with your state for its laws and guidelines.

The federal and state requirements governing for-profit businesses apply in large part to non-profits as well. The IRS requires 501(c)(3) organizations to have Employer Identification Numbers and to withhold income and payroll taxes from wages. State zoning laws apply to your place of business, and contributions must follow state and federal guidelines in order to be tax-deductible. Many tax-exempts hire the services of specialized agents and accountants to navigate the abundant red tape and regulations.