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What Is a 501c3?

Identification

The term "501 c3" refers to Section 501(c)(3) of the IRS tax code. This section lays out requirements for a specific type of business tax exemption.

Function

Section 501(c)(3) provides tax exemption for charitable businesses, often referred to as the "nonprofit tax exemption."

Misconceptions

Not all nonprofits are eligible for the 501(c)(3) tax exemption. To qualify, a business must exclusively serve an exempt purpose (of a few dozen), must not be a political organization or advocacy group, and must not set aside its profits for any private individual.

Benefits

Charitable organizations that benefit from Section 501(c)(3) are not taxed as for-profit businesses are; thus, they are able to invest more money in their charitable work.

Warning

Because Section 501(c)(3) grants a tax exemption that can easily be abused, the IRS regulates the exemption closely and is vigilant for any signs of abuse.

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