IRS 401C3 Tax Regulations

By David Carnes

An IRS 501(c)(3) organization (often mistaken as "401(c)(3)") is a corporation or a Limited Liability Company (LLC) that exists for religious, charitable, scientific, literary or educational purposes. A 501(c)(3) organization must use all of its profits for charitable purposes, but enjoys tax benefits unavailable to traditional business entities.

Forming a Company

The first step in forming a 501(c)(3) organization is to form a company. 501(c)(3) organizations may take one of two forms -- a corporation or a Limited Liability Company (LLC). The process is exactly the same for a 501(c)(3) as it is for other companies -- a legal company name must be registered, foundational documents (Articles of Incorporation or Articles of Organization) must be filed with the Secretary of State of the state in which the company is organized, and a filing fee must be paid.

Applying for Tax-Exempt Status

After a company has been formed, it must apply for federal tax exempt status. This is accomplished by filing IRS Form 1023, Form 8718 and a copy of the company's foundational document with the IRS. The IRS forms ask detailed information and can take time to prepare. Approval can take from several weeks to a year.

Federal Tax Benefits

501(c)(3) organizations are exempt from income tax, property tax and sales tax. They are also eligible for certain tax-deductible donations that are unavailable to traditional companies. 501(c)(3) organizations are still liable for employment and certain capital gains taxes.

State Tax Benefits

State tax-exempt status is available in every state; however, the procedures differ from state to state. In some states, all that is required is a letter from the IRS stating that the company has been granted 501(c)(3) status. In other states, a separate application process is required. Although some states offer only limited state tax exemptions, it is possible in some states to obtain state tax-exempt status even if the IRS refuses to grant the company 501(c)(3) status.

Maintaining 501(c)(3) Status

Maintaining 501(c)(3) status requires that company formalities applicable to corporations or LLCs be complied with (such as holding shareholders meetings). These formalities are somewhat less burdensome for LLCs than for corporations. The 501(c)(3) organization must continue to operate for its stated purpose, and certain federal and state informational filings are required so that the government can exercise oversight over the conduct of the organization. These filings vary at the federal level according to the type of organization, and at the state level according to the state of organization of the company.

About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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