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P2-U17 · Part 2 · Source cycle 2026-2027

Tax-Exempt Organizations

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Tax-Exempt Organizations (2025)

§501(c) Organization Types

§501(c) Type Key Features
(c)(3) Charitable, religious, educational Donors get deductible contributions; no political campaigns; limited lobbying
(c)(4) Social welfare, civic leagues Can engage in some political activity; donations generally NOT deductible (exception: volunteer fire companies)
(c)(5) Labor, agricultural, horticultural Donations not deductible
(c)(6) Business leagues, chambers, trade associations Donations not deductible; reported on Form 990
(c)(7) Social/recreational clubs Donations not deductible
(c)(1) Corporations organized by Act of Congress Federal instrumentalities

§501(c)(3) Requirements

  • Organized as corporation, trust, or unincorporated association (NOT partnership or sole proprietorship)
  • Operated for exempt purpose (charitable, educational, religious, scientific, literary, testing for public safety, fostering national/international amateur sports, preventing cruelty to children/animals)
  • No private benefit/inurement
  • No political campaign activity
  • Limited lobbying activity
  • Assets permanently dedicated to exempt purpose (dissolution clause required)

Application for Tax-Exempt Status

Form Use User Fee (2025)
Form 1023 §501(c)(3) organizations (full) $600
Form 1023-EZ §501(c)(3) small orgs (gross receipts ≤$50K, assets ≤$250K, not private foundation) $275
Form 1024 §501(a) organizations (brotherhood, welfare, etc.) Filed at pay.gov
Form 1024-A §501(c)(4) social welfare organizations Filed at pay.gov

Application Rules

  • Form 1023 required if gross receipts >$5,000/year (small orgs below threshold not required but should still apply for deductibility)
  • Churches: Automatically exempt, no Form 1023 required regardless of size
  • Must file online
  • 27-month rule: File within 27 months of month created → exempt status retroactive to creation date
  • Pending approval: organization can operate as exempt; donations deductible only if approved

Public Charity vs. Private Foundation

Default Classification

Every §501(c)(3) is presumed a private foundation unless it qualifies as a public charity.

Public Charity (automatic classification)

  • Churches
  • Schools
  • Hospitals
  • Government-supported organizations
  • Organizations with broad public support (>1/3 of support from public/government)

Key Differences

Feature Public Charity Private Foundation
Funding source Broad public support Limited (few donors)
Donor deduction limits More favorable More restrictive
Annual filing Form 990/990-EZ/990-N Form 990-PF (always, regardless of income)
Excise tax on investment income No Yes (§4940)

Form 990 Filing Thresholds

Gross Receipts Form Required
≤$50,000 Form 990-N (e-postcard)
<$200,000 AND assets <$500,000 Form 990-EZ
≥$200,000 OR assets ≥$500,000 Full Form 990

Filing Deadline

  • Due: 15th day of 5th month after year-end (May 15 for calendar year)
  • Extension: Form 8868, 6 months (to November 15 for calendar year)
  • Dissolved organization: final return due 5th month after dissolution
  • Electronic filing required (Taxpayer First Act)

Public Disclosure

§501(c)(3) organizations must make available to public:

  • Exemption application (Form 1023)
  • Last 3 years of annual returns (Form 990)
  • IRS also provides these for public inspection

Every exempt entity must have an EIN, regardless of employees.

Late Filing Penalties (Form 990)

Organization Size Daily Penalty Maximum
Gross receipts ≤$1,309,500 (2025) $25/day Lesser of $13,000 or 5% of gross receipts
Gross receipts >$1,309,500 (2025) $130/day $65,000

Automatic Revocation

  • 3 consecutive years of failure to file → automatic loss of tax-exempt status
  • Must reapply (Form 1023/1024 with fees) to restore
  • May need to file income tax returns and pay taxes during non-exempt period
  • Reasonable cause defense available

Charitable Contribution Disclosure Requirements

Donor Records

  • Donors must retain records before claiming deduction
  • Single contributions ≥$250: must obtain written contemporaneous acknowledgment from organization
  • Acknowledgment must show: cash amount or property description, value of goods/services received (or statement that none received)

Quid Pro Quo Contributions

  • Payment >$75 where donor receives goods/services in return
  • Organization must provide written statement with:
    • Amount of deductible contribution (payment − value of goods/services)
    • Good faith estimate of goods/services fair market value
    • Insubstantial goods/services need not be described

Exempt Organizations with Employees

Basic Compliance

  • Must withhold and remit income tax, Social Security, Medicare
  • May be subject to FUTA (some exempt orgs exempt from FUTA)

Excess Executive Compensation Excise Tax

  • 21% excise tax on compensation >$1,000,000 per covered employee
  • "Covered employee": one of top 5 highest-paid employees
  • Once covered, always covered (even if future comp drops below top 5)
  • Reported on Form 4720
  • Due: 15th day of 5th month after employer's year-end

Unrelated Business Income Tax (UBIT)

Definition

Tax on income from trade/business regularly carried on that is NOT substantially related to exempt purpose. Three conditions:

  1. Is a trade or business
  2. Is regularly carried on
  3. Is not substantially related to exempt purpose

Tax Rate & Filing

  • Taxed at corporate rates (21%)
  • $1,000 specific deduction
  • Form 990-T required if unrelated business gross income ≥$1,000
  • Due: 15th day of 5th month after year-end (same as Form 990)
  • Estimated tax required if expected tax ≥$500 (quarterly)

TCJA Requirement

Must calculate UBTI separately for each unrelated business activity. Loss from one activity CANNOT offset income from another.

Exceptions (NOT UBIT)

  • Trade/business where substantially all work performed by volunteers
  • Selling donated merchandise
  • Certain rental income
  • Certain dividend/interest/royalty income
  • Research income for universities/hospitals

Private Foundation Rules

Code Section Rule
§4940 1.39% excise tax on net investment income
§4941 Self-dealing prohibitions (between foundation and disqualified persons)
§4942 Must distribute minimum 5% of assets annually
§4943 Excess business holdings limits (>20% owned by disqualified persons)
§4944 Jeopardizing investments prohibited
§4945 Taxable expenditures (political, lobbying, non-charitable grants to individuals)

Key Connected Rules

  • Business Entities Overview → See business-entities-overview.md
  • Agricultural Enterprises → See agricultural-enterprises.md
  • Trusts & Estates → See trusts-and-estates.md