1. There Are Limits To Legislative Lobbying.
A 501c3 organization is allowed to spend a maximum of 20% of its total operating budget on legislative lobbying. Some specific restrictions may be placed for certain industries in addition to this operating cap. The organization must also seek approval to begin lobbying.
2. There Is No Getting Involved With Politics At Any Level.
One of the most common ways for a 501c3 organization to lose its tax-exempt status is to endorse a political candidate or come out against a specific candidate. This ban on endorsements applies at all levels of government. A 501c3 organization cannot endorse a Presidential candidate or someone for the local school board. They are supposed to be completely neutral.
3. The Earnings Of The Organization Cannot Benefit Private Individuals Or Shareholders.
Tax exempt organizations with a 501c3 status are allowed to earn profits. The nonprofit status simply means that the goal of the programs or services being run shouldn’t be just to make money. The top priority is to serve the public good. When profits are made, the organization cannot use those profits to benefit private individuals or shareholders in some way. People cannot make personal net worth gains because they are involved with a 501c3.
4. There Are Specific Disbursement Rules That Must Also Be Followed.
The 501c3 organization that supported the ministries of Mars Hill, headed by Mark Driscoll, folded in 2014 and its assets were distributed to 11 different churches around the country. When an organization with this tax status stops doing business, the rules of profit for private individuals or shareholders still remains. The assets of an out-of-business 501c3 must go to another 501c3 organization or one that is also tax exempt.
5. Federal 501c3 Status Does Not Always Mean An Equal State Status.
Although many states will recognize the awarding of a 501c3 status by the federal government, this is not true for every state. Some require that the organization provide a separate application to the state. A notable exception in the 501c3 rules and regulations is the requirements set forth by the state of California. An organization that wants to become a 501c3 must complete a similar application for the state as they did for the federal government and cannot operate within the state as tax exempt until approval is received.
6. There Are Organizational Structure Restrictions In Place.
A sole proprietorship or a partnership cannot be awarded a 501c3 status. These types of businesses can still provide charitable work for their communities and even create philanthropic goals, but any tax exempt status granted to them will not be the 501c3 status. In most cases, this tax exempt status is awarded to organizations by the IRS. An LLC has the ability to be awarded this status as well, but only if 100% of the members who formed the LLC have already been granted the tax exempt status.
7. Not All Organizations Need To Apply For An Official Status.
Churches are specifically exempt from the need to apply for 501c3 status. Their status is automatically assumed by the IRS. This automatic status can be removed, however, if there is evidence which shows a church has become politically active or the congregation/membership does not believe the creed of the church. Because beliefs are so widely varied, however, there is no actual definition of what a “church” happens to be for tax purposes.
8. All 501c3 Applications Are Treated As a Private Foundation Upon Initial Acceptance.
The IRS requires any organization who wants to be classified as a public charity to pass a giving test. It means that 1/3 of the organization’s donations must come from the general public and the total amount of those gifts cannot exceed 2% of the total budget. Private foundations are required to file lengthy tax returns, even though both are of the 501c3 status, and that can be advantageous for organizations with small operational budgets.
The 501c3 rules and regulations explained here are designed to give tax exempt organizations more funds to help them continue work that benefits the public good. If these rules are not being followed, then it becomes possible for an organization to lose their status and be required to pay taxes in the current and future tax years.