The Internal Revenue Code contains the vast body of federal tax law. Certain code sections are ubiquitous and well-known based upon their frequency of use. Some of the more infamous tax provisions are Sections 61, 162, and 501. This blog will cover § 501 otherwise known as 26 U.S.C. § 501: Exemption from tax on corporations, certain trusts, etc. § 501 of the U.S. tax code outlines which types of nonprofit organizations are tax-exempt. § 501(a) states that certain organizations are exempt from some federal income taxes if they fall under §§ 501(c), 501(d), or § 401(a).
- 501(c), which is probably the most well-known of the provisions contained in §501, has 29 sections which list specific conditions particular organizations must meet in order to be considered tax-exempt for federal tax purposes.
- 501(c)(3) is for corporations, community chests, funds or foundations which exist to pursue the following purposes (provided these organizations have no involvement in political campaigns):
- Religious
- Charitable
- Scientific
- Testing for public safety
- Literary/educational purposes
- Fostering national or international amateur sports competition, if none of the funds are used for sports equipment. Congress added Section 501(j) to provide exemption for “real” amateur athletic organizations even if they provided equipment or facilities.
- The prevention of cruelty to children or animals
An entity determined by the IRS to be eligible under the 501(c)(3) is generally exempt from taxes on income that it takes in as contribution, as well as income that it makes on its own. Also, donors to such entities may generally deduct the amount of their donations from their taxable income, if they itemize their deductions.
- 501(h) outlines one of two tests for measuring an eligible 501(c)(3) organization’s lobbying expenditures. Pursuant to § 501(h), a charity may use up to 20% of the first $500,000 of its exempt expenditures for lobbying purposes. For organizations with larger budgets, this level of expenditures increases on a sliding scale to a maximum of $1 million.
- 501(h) provides more generous lobbying limits than the “insubstantial part” test used by the IRS since 1034, and is easier to calculate. This section also includes a clear definition of lobbying communications, volunteer efforts not considered in lobbying limits, safeguards ensuring an electing charitable organization may not lose its exemption for a year’s excessive expenditures, and no personal penalty for individual managers whose charity exceeds its lobbying expenditure limits.
- 501(i) prohibits discrimination by certain social clubs, declaring an organization described in subsection (c)(7) shall not be exempt from taxation if at any time during the taxable year a governing instrument of the organization provides for discrimination against any person on the basis of race, color, or religion.
- 501(j), extends tax-exempt status to organizations training athletes, by adding to 501(c)(3) a provision allowing amateur sports organization to provide facilities and equipment if its primary purpose is to develop amateur athletes for national or international sports competition. Amateur sports organizations may also be considered educational if focused on youth athletics, however, the IRS will not grant exemptions for athletic activities that are mostly recreational, such as adult bowling and softball leagues.
- 501(p) states that an organization’s tax-exempt status will be suspended upon proof that it is engaged in terrorist activities. The definition of “terrorist” is taken from § 212 or § 219 of the Immigration and Nationality Act.
- 501(q) outlines special rules for credit counseling organizations.
It is of the utmost importance when facing tax-related issues to consider the assistance of an experienced tax attorney. If you live in the New York or the Tri-State area and are facing any of the questions or scenarios presented above, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
