What is a 501(c)(3)?

What does 501(c)(3) actually mean?

“Nonprofit” is something your state grants when you form a nonprofit corporation. 501(c)(3) is a separate, federal tax status from the IRS. The exemption covers income related to your mission; income from an unrelated business can still be taxed.

The status also opens doors outside the IRS. For example, most U.S. 501(c)(3)s can apply for Google Workspace for Nonprofits: free email on your own domain, plus Docs and Drive. Government bodies, hospitals, healthcare groups and schools cannot. But a foundation that raises money for a hospital, healthcare group or school can.

What are the requirements?

The IRS looks at two things: how you're organized and how you operate. You must be organized and run exclusively for an exempt purpose, none of your earnings can go to a private individual or shareholder, and you can't participate in political campaigns for or against candidates. Lobbying to influence legislation is allowed only in limited amounts.

Public charity or private foundation?

Every 501(c)(3) is classified as one or the other. The IRS treats a 501(c)(3) as a private foundation unless it qualifies as a public charity. Generally, churches, schools and hospitals are public charities, and so are groups that raise money actively and get gifts from many sources. Private foundations, the IRS says, typically have one major funder, often one family or company, and mostly make grants to others.

If you plan to raise money from many donors, you ask to be classified as a public charity when you file your Form 1023 or 1023-EZ.

How do you get 501(c)(3) status?

You apply to the IRS online with Form 1023 or the shorter Form 1023-EZ. Smaller organizations that meet the IRS eligibility rules can use the 1023-EZ; larger or more complex ones file the full 1023. Before you apply, you generally need to form your nonprofit under state law and get an EIN. Some groups can be tax-exempt without applying, such as churches, some very small charities, and local chapters covered by their national group's IRS group exemption. Many small groups and churches apply anyway, because donors and grantmakers often ask to see the IRS letter that confirms their 501(c)(3) status.

Key terms

• 501(c)(3): the section of the federal tax code that makes qualifying charitable nonprofits tax-exempt.
• Public charity: a 501(c)(3) with broad public support, or a church, school or hospital.
• Private foundation: a 501(c)(3) that does not qualify as a public charity, often funded by one family or company, that mainly makes grants to others.
• Tax-exempt: not required to pay federal income tax on income tied to the exempt purpose.
• Tax-deductible: a donation the donor can subtract from taxable income, generally true for gifts to 501(c)(3)s.
• EIN: the Employer Identification Number the IRS assigns your organization, needed before you apply.