What are the Primary Benefits of 501(c)(3) corporation Tax Exempt Status

Nonprofits are eligible to apply for 501(c)(3) tax exemption if their purpose is to become a charitable, religious, scientific or educational organization. After gaining the 501(c)(3) status, organizations redeem various benefits to help their cause. We at NonprofitLegalCenter.com will help your organization become 501(c)(3) tax deductible!

Reminder: Upcoming IRS Phone Forum – 501(c)(7) Social and Recreational Organizations

On August 21 from 2:00PM-3:00PM EDT, the IRS Exempt Organizations will be holding a phone forum discussing 501(c)(7) Social and Recreational Organizations. These organizations are defined as being organized for pleasure, recreation and other nonprofitable purposes. Examples include fraternities, country clubs, hobby clubs and sports clubs. The central purpose of these organizations is to provide…

Your 501(c)(4) organization might be eligible for expedited processing of you application, according to an IRS update. To qualify, your organization must meet all of the following criteria:

  • Your organization applied for exemption as a 501(c)(4) organization.
  • Your application had been pending for more than 120 days as of May 28, 2013.
  • Your case involves possible political campaign intervention or issue advocacy.

If this information pertains to your organization, you may receive a Letter 5228, which is an Application Notification of Expedited 501(c)(4) Option. In order to self-certify your organization with a Letter 5228, your organization must devote “60% or more of both spending and time to activities that promote social welfare as defined by Section 501(c)(4)” and devote less than 40% of your efforts to political campaign intervention. Also, your organization needs to ensure that these thresholds apply for past, current and future activities. Follow the instructions listed in Letter 5228 to self-certify your organization and sign and return pages 4-5 within 45 days of the date of the letter.

For more information about Letter 5228 including how to make sure you meet the eligibility criteria in order to receive the letter, visit this page provided by the IRS.

Just a friendly reminder that if your nonprofit’s fiscal year
ends December 31st, your filings are DUE May 15th.

Filing your annual financial data with the IRS is a crucial
way to maintain your 501c3 status. You don’t want your 501c3
status to be revoked like so many nonprofits did last year.

We’re offering a discount on our nonprofit tax filing services.
Remember you must file your 990 tax filing by four and one half
months after the end of your fiscal year. Give us a call to find out more.

We will throw in handling your annual state compliance as
well as part of this special offering (your organization
will be responsible for the state filing fees).

Please call us at 800-928-4161 to discuss how we can help
your nonprofit stay compliant as tax season approaches.

DID YOU FAIL TO FILE A 990 RETURN FOR ’07, ’08, and ’09?  If so, you may have lost your status. Fortunately if you act quickly you may be able to save your tax exempt status. Read below and Call us at 800-928-4161 for further information on how we can get your status restored.
Normally we help nonprofits stay compliant or to get started and established as a 501c3.  But since the IRS mass revocation announcement, we are already helping a few people recover their status.  One youth athletic organization which owns a baseball field had turnover in their parent leadership and just stopped filing for three years. Another was just inactive and did not know about the rule change in 2006 that all exempt organizations must file. Both had their status revoked for not filing 990 returns for three years.  Here is a recent announcement from the IRS, where you can research whether your nonprofit’s status has been revoked:

The Internal Revenue Service today announced that it has released a listing of  approximately 275,000 organizations that under the law have automatically lost their tax-exempt status because they have not filed annual reports as legally required for the past three years. If an organization appears on the list of auto-revoked organizations it is because IRS records indicate the organization has a filing requirement and has not filed the required returns or notices for 2007, 2008 and 2009.

The IRS has issued guidance on how organizations can apply for reinstatement of their tax-exempt status, including retroactive reinstatement. In addition, the IRS announced transition relief for certain smaller tax-exempt groups – those with annual gross receipts of $50,000 or less for 2010 and eligible to file Form 990-N, the e-Postcard.  The relief allows eligible revoked groups to gain retroactive tax-exempt status and pay a reduced application fee of $100 rather than the typical $400 fee. More information, including FAQs and a Fact Sheet, can be found on the  IRS website.


Here is an IRS YouTube video on the subject.
We at the Nonprofit Legal Center wish you well with your endeavors, and I hope you are enjoying your summer. 

Most nonprofit organization’s seek 501c3 status from the IRS as it provides the most tax benefits.  501c3 nonprofits can apply for grants and provide tax deductible receipts to people who support the organization with donations.  501c3s are limited in their ability to lobby so if you want to do explicitly political work most of the time then another type of 501c would be appropriate.  501c4 organizations can participate in political campaigns and electoral politics to an unlimited extent, but donations made are not tax deductible.

 We’ll cover the difference between public charity and private foundation 501c3 organizations in another post shortly so stay tuned.

These are a couple of good resources that may help clarify which type of nonprofit your organization is.  If you’re still not sure, give us a call for your free 20 minute consultation at 800-928-4161.

IRS Tax Exempt Reference Chart: http://www.nonprofitlegalcenter.com/nonprofit-resources/tax-exempt-organization-chart.html

Common Nonprofit Definitions

501c3: Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, National or International Amateur Sports Competitions, Prevention of Cruelty to Children or Animals Organizations.

Charitable contributions are tax deductible. Limited ability or restrictions to lobbying.

501c4: Civic Leagues, Social Welfare Organizations, and Local Associations of Employees.

Charitable contributions are NOT tax deductible. Unlimited ability to lobby for legislation and the ability to participate in political campaigns and elections.



1.  What is a private foundation, or family foundation? Technically, it is a not-for-profit entity that can be controlled by a person, family or business. Sometimes private foundations are referred to as ‘family foundations’. They are organized exclusively for charitable, educational, religious, scientific and literary purposes under Section 501(c)(3) of the IRS Code. The foundation must be officially recognized by the IRS in order for contributions to it to be tax deductible. In practice, a private foundation is a unique planned giving vehicle that fosters family involvement, provides significant control over assets and giving, and allows donors to receive an immediate tax deduction for charitable donations that are made in the future.

 2.  What are the benefits of a private foundation?

  • Family legacy. A private foundation establishes a legacy of giving that can carry the family name, supports causes that are important to you, and promotes charitable activities into the future.
  • Control. Private foundations provide the greatest control of any planned giving vehicle. You decide which charities to support and how the assets are invested. You also have great latitude as to the types of assets you can donate to the foundation.
  • Family involvement. A private foundation enables you to involve the family in philanthropy and pass values on to future generations.
  • Current tax deduction for future grants. You can take an immediate tax deduction for contributed assets, even if the foundation does not make charitable grants until a later date. You are also able to remove taxable assets from your estate, without incurring capital gains taxes. (Consult with your tax advisor.

3.  How does a private foundation compare to a Donor Advised Fund? The difference is mainly in control and flexibility. With a private foundation, the donor retains control over charitable donations and other disbursements. Foundations can hire staff, reimburse expenses, set up structured giving programs such as scholarships, and make grants directly to individuals in need. In addition, donors can contribute a much wider variety of assets to fund the foundation, such as “144” restricted stock, and the founder retains control over how the assets are invested. Contributors to a donor advised fund make irrevocable contributions to a nonprofit organization that administers the fund and makes decisions regarding fund investments. Contributors may recommend eligible charities as recipients for grants, but the fund’s governing body is free to accept or reject any recommendation.

4.  What is the difference between a private foundation and a public charity?

The Foundation Center defines a private foundation as a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or directors. Private foundations maintain or aid charitable, educational, religious, or other activities serving the public good, primarily through the making of grants to other nonprofit organizations.

To understand what a private foundation is, it helps to understand what it is not. Every U.S. and foreign charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a “private foundation” unless it demonstrates to the IRS that it falls into another category. Broadly speaking, organizations that are not private foundations are public charities as described in Section 509(a) of the Internal Revenue Service Code.

Another difference between private foundations and public charities is that public charities generally derive their funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. Although some public charities engage in grantmaking activities (see information and resources below on grantmaking public charities), most conduct direct service or other tax-exempt activities. A private foundation, on the other hand, usually derives its principal fund from a single source, such as an individual, family, or corporation, and more often than not is a grantmaker. A private foundation does not solicit funds from the public.

Not every organization that uses the word “foundation” in its name is a private foundation, and the word “foundation” has no legal meaning in and of itself. Instead you must look at how the IRS designates an organization and inquire as to whether they file a Form 990-PF (the tax return filed by private foundations) or a Form 990 (the tax return filed by public charities and other nonprofit organizations).

5.  How may foundation assets be used? Donations to a private foundation may only be used for charitable purposes and certain administrative expenses.


6.  Can I or members of my family be employed by my foundation? Yes. By appointing children or other family members as officers or directors, you will have the option of making the foundation a family affair. However, paying yourself or family members requires strict adherence to detailed IRS rules. To avoid the potential for legal problems, you must consult with your attorney before paying yourself or family members.

 7. Can my family or I engage in transactions with the foundation? The IRS strictly prohibits self dealing. Disqualified individuals (the donor, lineal descendants and antecedents, e.g., parents, children and their spouses, and people under their employment) may not engage in transactions with the foundation except to make donations to it, or under limited circumstances, to receive fair market value compensation for services. Examples of self dealing include:

* Purchasing items from or selling items to the foundation.

* Personal use of foundation assets or income.

* Borrowing money from the foundation.

* Retaining foundation assets (e.g., paintings) on private premises.


8.  Who can a private foundation give money (make grants) to? Private foundations typically carry out their philanthropy by making grants to recognized public charities. This includes churches and synagogues, educational, scientific and cultural institutions, poverty relief agencies or any other organization that qualifies as a 501(c)(3) charity according to the IRS.  In some instances, a private foundation may provide grant money to individuals in the form of scholarships or grants for a particular project such as a art grant.


Private foundations are generally precluded from making grants to political campaigns or organizations that exist to influence legislation and voting.


9.  Is there a minimum or maximum amount a private foundation must give away each year? The IRS requires that private foundations pay out at least 5% of the previous year’s average net assets for charitable purposes. This can include certain administrative expenses. There is no maximum limit on giving.

 10.  What types of organizations can a private foundation make grants to? Private foundations can give to any organization recognized by the Internal Revenue Service as a public charity. This includes churches and synagogues, educational, scientific and cultural institutions, poverty relief agencies or any other organization that qualifies as a 501(c)(3) charity according to the IRS.

11.  How does a nonprofit supporting organization, compare to a private foundation?

A supporting organization is actually a private foundation as well, but it is treated, for tax purposes, as a public charity. This is because, under the tax law, it is so closely connected to at least one public charity that it is almost a part of that organization. The connection can be achieved by having a majority of the Foundation’s board appointed by the public charity.  Or, the purpose of the Foundation can be to support specific projects of the public charity, in such amounts that the government can be reasonably assured that the public charity will be supervising the activities of the Foundation. The special tax status is granted because Congress is comfortable that the public will be protected, through the oversight and control by a public charity. Be careful, here, however, because the IRS has increasingly scrutinized both the applications of new supporting organizations, and their operations, just to be sure that there is such active oversight and control.


12.  What are the penalties for failing to make the 5% payout within the designated time period?

Failure to make the 5% minimum payout results in a penalty equal to 15 percent of the remaining amount of the total payout that was not distributed as required. Remember, though, that this 5% payout requirement does not require payment during the first year of the foundation’s operation; while establishing yourself, you can defer grants into the second year – but not beyond (except under special set-aside rules).


13.  Is it legal to compensate the trustees/board members of a charitable foundation?

Yes.  Although the charity cannot exist for the significant benefit of a private individual, board service does involve devotion of time and expertise, for which individuals may be reasonably compensated.

The issue of “reasonable” compensation is a critical consideration. What comprises reasonable payments? The best guideline may be what other foundations in your area, with similar assets, do or do not pay their officers. This information is publicly available, as is federally mandated.

14.  What is self-dealing and why is it illegal?

Self-dealing involves a direct or indirect transaction (generally a financial transaction) between the foundation and a “disqualified person” – even if the transaction would benefit the foundation. Self-dealing also includes any use of foundation income or assets by a private foundation for the benefit of a “disqualified person.” The self-dealing rules are outlined in Internal Revenue Code Section 4941 and were created to prevent misuse of foundation funds and assets for the personal gain of officers/directors and their friends or family.


Disqualified persons include, among others:

  • Foundation trustees, directors, managers, or officers;
  • Substantial contributors to the foundation;
  • An owner of more than 20% of any business that is a substantial contributor;
  • Members of the family of any of the above, including spouses, children, grandchildren, great- grandchildren, parents, other ancestors, or spouses of children, grandchildren or great-grandchildren;
  • Any corporation in which more than 35% of the voting power is owned by disqualified persons; and
  • Certain government officials.

Prohibited transactions include:

  • The sale, exchange or leasing of property (e.g. purchasing office supplies, printing or insurance from a disqualified person);
  • The lending of money or extensions of credit;
  • The furnishing of goods, services or facilities for money;
  • The transfer of, or use of the income or assets of a foundation for the benefit of a disqualified person; and
  • The payment of money or property to a government official.


Questions to consider if you want to start your own foundation:

1) What state will be the foundation’s base?

Foundations are organized under state law and are generally established in the state where the foundation intends to do business. Unless laws vary drastically from IRS regulations in your state, generally, there is no need to state-shop when setting up a foundation. If the foundation is incorporated in one state but has a primary office in another state, the law requires that you file annually in both states.

2) What type of foundation?

  • Private/Independent/Family Foundation:  The IRS classifies an organization as a private foundation rather than a public charity when its funding comes from limited sources – an individual, a family, a corporation, or a small group of donors – rather than major support from the general public. The terms private and independent are often used interchangeably with the term family foundation. Family foundations are usually organized in the form of a nonprofit corporation or a trust and the bulk of the budget is usually made up of grants to other charitable organizations.

Private foundations have more autonomy and flexibility that other types of foundations. For example, directors are not subject to constant review by the organization’s members and are not responsible to shareholders. Private foundations are governed by different legal regulations than public charities and are required to pay a tax on investment income and make charitable expenditures that equal or exceed 5 percent of their endowment.

  • Company/Corporate Foundation: This model is subject to the same rules as a private foundation but the source of funds is a for-profit company. It usually has a small endowment allowing for a reserve during low-profit years, funds pass through the foundation, and grants made generally come from charitable contributions of the for-profit company in the same year.
  • Pass-Through or Conduit Foundation: A private, nonoperating foundation usually established by a donor during his/her lifetime to establish governing rules in anticipation of a large future bequest. Donors may take advantage of more liberal charitable deduction rules, no gifts may be used to build an endowment and all contributions must pass through the foundation no later than two and a half months after the end of the tax year in which the gifts are made.
  • Pooled Common Fund: In this model, one or more donors may make contributions that are pooled into a common fund. A donor (or donor’s spouse) may retain the right to designate annually which organizations will benefit from income from donor’s contributions. All recipients of funds must be public charities as defined in Section 509(a)(1) of the tax code. The fund’s governing instrument must provide for distributions and in fact pay out all adjusted net income after certain other requirements are met.This model also provides the donor with substantial control over distribution of funds and donors are subject to more liberal charitable deduction rules.
  • Operating Foundation: Directly operates its own charitable program (i.e. running a museum) instead of making grants to other charitable organizations. Donors may take advantage of more liberal charitable deduction rules and the foundation generally must spend at least 85 percent of its investment income directly for the operation of its charitable activities. Other regulations apply (see article).

3) Will the foundation be established as a charitable trust or in corporate form?

Many donors choose to establish a charitable trust because it is simple to create and generally does not require approval by a governmental agency. The law of trusts is based on common laws and is therefore more flexible and less precise than the laws of incorporation. Trusts also have more flexibility in receiving and disposing of real property than nonprofit corporations.

On the other hand, a nonprofit corporation provides greater protection from liability for directors. Directors of a nonprofit corporation are held to less stringent fiduciary standards than trustees of a trust. Delegation of investment decisions, enlarging the governing board or replacing board members may also be handled more effectively in the corporate form.

4) How do I incorporate?

If you choose to incorporate, the foundation’s proposed name should be cleared with the state, and a “certificate of incorporation” or similar document must be prepared in accordance with state laws. The federal requirements for exempt status as a private foundation demand that the certificate include:

  • language establishing its charitable, educational or similar purpose in the purpose clause;
  • a statement that the earnings of the corporation shall not result in any private benefit to its members, trustees, or officers (except for reasonable compensation for personal services rendered);
  • a statement that no substantial part of the corporation’s activities shall consist of attempts to influence legislation (except where that legislation may affect the foundation’s operation) and that it shall not participate in political campaigns;
  • a clause providing that on dissolution the assets shall be disposed of for charitable purposes;
  • a statement that the corporation will comply with the requirements of Sections 4941, 4942, 4943, 4944, and 4945 of the Internal Revenue Code.

Note:  Many purpose clauses are drafted in general language to simplify the process of obtaining tax exemption and to allow the governing board flexibility to modify policy in the future.  The purpose clause should be drafted with more specificity if the donor’s intent is to make sure that the foundation adheres closely to particular charitable purpose.

5) Will the foundation created have a limited life or perpetuity?

Most states give perpetual life to corporations created by statute while providing ways for their members and others to terminate them.  In most states, trusts created for the benefit of charity can exist in perpetuity.  Some donors choose to limit the foundation’s life to a term of years, at the end of which all assets must be distributed.

Following are some issues that must be considered in determining the life of the foundation:  Is the foundation’s charitable purpose an area with limited life or one that can be funded in perpetuity?  Will work be carried on by future generations or is it something the donor wants to end at a particular point in time?  Will the initial endowment carry into the future?  Will the foundation raise funds to add to the endowment?  Will the foundation set up an investment policy to increase the endowment, or will the intent be for initial endowment to be disbursed, and the foundation dissolved upon final disbursement?

6) What will the governing body look like?

Once a foundation is established, the donor must decide the size, make-up, method of election, and tenure of its governing body.  Specifics of the governing body may be outlined in the foundation’s bylaws rather than in the certificate of incorporation because they will be easier to change.  The bylaws should contain authorization for appointing committees of the board, electing officers, notice and waiver of notice of meetings, and similar provisions addressing the foundation’s administration.  Basically, they should make clear that the board has authority to run the foundation.

7) What is an organizational meeting?

Under state law, corporations generally hold an initial meeting to: elect director(s) and officers, adopt the corporation’s bylaws, pass a resolution to open bank accounts and sign signature cards, establish the fiscal year, adopt a corporate seal, provide for recruitment of initial or interim staff, record the minutes of this meeting and file them with subsequent meeting minutes to be kept for the life of the foundation. This meeting can be held as soon as the state has approved the foundation’s certificate of incorporation, thus making the foundation a legal entity.

8) How do I file for Exempt Status with the IRS?

Upon receiving the certificate of incorporation and adopting bylaws, the foundation can seek exemption from federal income tax. This will assure that contributions to the foundation are tax deductible. A Form 1023 must be filed with the appropriate IRS district within fifteen months of the foundation’s organization under state law. When granted, IRS recognition of exempt status will then be retroactive to the date of organization.

In addition to the Form 1023, a foundation must file for an employer identification number on Form SS-4 (this is necessary whether or not the foundation intends to hire employees).  After filing Form1023, the foundation waits for a determination letter from IRS (generally a few months). In the meantime, the foundation must file a Form 990-PF with IRS and state authorities on or before the due date as if the federal tax-exempt status has been determined.




 Wondering how you can avoid all the paperwork and filing fees for becoming a 501c3 nonprofit organization, but still be able to apply for grants and offer donors a tax deduction?  Fiscal Sponsorship is the solution for your project or new nonprofit.  It’s simple.  As a project or program of an existing 501c3, you can operate your organization, further your mission and help people!  You can even fundraise to cover the start up fees to eventually become a fully operational independent organization.  You need only partner with an existing 501c3 organization who is willing to sponsor your organization.  The purpose of the 501c3 must be able to encompass the work that your organization intends to do.  Our services include determining that the purposes are legally similar enough to enter into this kind of relationship.

 Fiscal Sponsorship is a great way for the existing 501c3 organization to help incubate projects that will further the mission and purpose of your organization.  This looks good for you as an organization and is great for leveraging funds.  These kinds of partnerships benefit everyone involved.

 Below you will find a list of Fiscal Sponsorship Organization across the nation.



Dance Films Association

48 West 21st Street, #907; New York, NY 10010
tel: (212) 727-0764
email: info(at)dancefilms.org

Dance Films Association was started in 1956 with a mission to foster dance on camera films.  As an international known membership organization, DFA connects artists and organizations, fosters new works for new audiences, and shares essential resources.  DFA seeks to be a catalyst for innovation in and preservation of dance on camera. DFA offers fiscal sponsorship to filmmakers, choreographers, dancers, musicians, and other artists who are creating dance on camera, which covers a wide range of film experiences from experimental to documentary.

Earth Island Institute

2150 Allston Way; Ste. 450, Berkeley, CA 94704
tel: (510) 859-9100

Earth Island Institute develops and supports projects that counteract threats to the biological and cultural diversity that sustain the environment. As an alternative to dozens of separate nonprofits, each duplicating basic administrative functions, EII is a consortium of more than thirty grassroots campaigns, each functioning independently while sharing resources and benefiting from the synergistic exchange of experience, ideas, and energy.
Earth Island Institute provides non-profit sponsorship and administrative services for new and existing Projects. In addition, we provide our Projects with assistance in strategic planning, public outreach, fundraising, and other resources and services that maximize the effectiveness and quality of their collective efforts.


Fractured Atlas

248 West 35th St. #1202, New York, NY, 10001
tel: (212) 624-5851

Fractured Atlas is a national nonprofit arts service organization. Our fiscal sponsorship program is open to independent artists and emerging arts organizations nationally working in any artistic discipline. Applications are accepted on a rolling basis and approved monthly. Projects manage a sponsored fund through our unique online tool kit on our website and you must have regular access to the internet to participate.


New York Foundation for the Arts (NYFA)

20 Jay Street, Ste 740, New York, NY 11201
tel: (212) 366-6900
fax: (212) 366-1778
email: sponsor(at)nyfa.org

NYFA’s mission is to empower artists at critical stages in their creative lives. NYFA is the largest provider of grants, services, and information to artists working in all disciplines in the United States.



A nonprofit’s Board of Directors functions as the governing body of the nonprofit and has an overall responsibility for the organization. The role of the Board of Directors is to act as a group making decision to further the purpose of the nonprofit. Some of these decisions and responsibilities are:

1. Provide continuity for the organization by setting up a corporation or legal existence, and to represent the organization’s point of view through interpretation of its products and services, and advocacy for them.  It is the responsibility of the Board of Directors to select and appoint a Chief Executive to whom responsibility for the administration of the organization is delegated, including:

– To review and evaluate his/her performance regularly on the basis of a specific job description, including executive relations with the board, leadership in the organization, in program planning and implementation, and in management of the organization and its personnel.
– To offer administrative guidance and determine whether to dismiss or retain the executive.


2. Govern the organization by broad policies and objectives, formulated and agreed upon by the Chief Executive and employees, assigning priorities and ensuring the organization’s capacity to carry out programs by continually reviewing its work.

Acquire and manage sufficient resources for the organization’s operations and to finance the products and services adequately

4.  Account to the public for the operations and services of the organization and expenditures of its funds, including:

– To provide for fiscal accountability, approve the budget, and formulate policies related to contracts from public or private resources.
– To accept responsibility for all conditions and policies attached to new, innovative, or experimental programs.

5. Determine the organization’s mission and purpose and monitor the organization’s programs and services.

6. Ensure effective organizational planning.

7. Enhance the organization’s public image.

8. Assess its own performance

Tips on Board Recruitment

–          Limited or have no family relations on your Board of Directors, unless a private foundation, because of conflicts.
–          Do not involve business relations due to conflicts.
–          Choose Board Member’s whose skill sets will support the nonprofit’s mission – a lawyer, an accountant, individuals in the business world, person    knowledgeable in the area of the nonprofit’s purpose, or members of the community served by the nonprofit.
–          Select a Board of Directors that is committed to the nonprofit’s mission.

This list was compiled from various writers and texts; including: Brenda Hanlon, in In Boards We Trust (as slightly modified by Carter McNamara to be “Nonprofit/For-profit Neutral”) and BoardSource, in their booklet “Ten Basic Responsibilities of Nonprofit Boards.”