How 503c Organization Works for Non-Profits

Charitable and non-profit organizations are provided special status in the Internal Revenue Code.  Section 501(c)(3) is the section of the Code that explains the more than 25 different types of organizations that qualify for tax exempt status.  Many times Section 501(c)(3) is referred to as Section 503(c).  503(c) is actually a section of the Internal Revenue Code that explains the future status of organizations that applied for 501(c)(3) designation and were denied the tax exemption.  For purposes of this article, 503(c) and 501(c)(3) will be used interchangeably.

Common Use of 503(c) Status           

There are 26 different types of non-profit organizations that qualify for federal tax relief.  The most common types of non-profits seeking 501(c)(3) status include:

• Civil Leagues;
• Social Welfare Groups;
• Religious Organizations;
• Educational Institutions;
• Recreational Clubs;
• Chambers of Commerce and similar business organizations; and
• Certain Retirement Fund Associations, such as Teachers Retirement Fund Associations.

Benefits of 503(c)

Organizations, such as those listed above, who qualify for this special status obtain important benefits.  Those benefits include:

• An exemption from paying federal income tax;
• State tax exemptions;
• The ability to offer donors a tax deduction for their donations;
• The ability to receive private foundation grants; and
• A discount on using the U.S. mail system.

Setting Up a 503(c)

Since the benefits can be so important to the mission of a non-profit organization, it is important to set up the organization according to the requirements of the Internal Revenue Code.  In order to set up a non-profit, most organizations must file IRS Form 1023 with the required filing fee.   Churches and organizations that are not private foundations and gross less than $5,000 per year are exempt from filing Form 1023.

When to Call an Attorney

In order to obtain tax exempt status for a non-profit organization, it is important to comply with all IRS rules and complete all of the forms correctly.  The benefits can be crucial to the success of a nonprofit group.  Likewise, the penalties for defrauding the IRS, even unintentionally, can be significant.  Talk to a local business or tax attorney help you file complete and accurate IRS papers and advocate for your tax exempt status so that you can concentrate on the mission of your organization.