Charitable Trusts

Internal Revenue Code 501(c)(3) (commonly written as 501c3) governs various types of charitable non-profit organizations. It sets forth the rules and requirements for achieving non-profit status, as well as for maintaining it. Typically an entity must qualify under irs 501c3 in order for charitable donations made to the entity to be tax-deductible to the donors.

There are a number of pros and cons to gaining and maintaining 501c3 status. The pros have to do with tax advantages and other benefits. The cons mostly have to do with regulation and responsibilities an organization must fulfill in order to maintain its 501c3 status.

Benefits of 501(c)(3) Status

• Donors to the Organization May Deduct their Donations
• No Federal Income Taxes — With some exceptions for unrelated business activities.
• Freedom from the FUTA (federal unemployment tax)
• Eligibility for Government Grants and Foundation Grants
• Eligibility for Bulk Mailing Permits from the U.S. Post Office
• Gambling Permits — In some jurisdictions, and with some limitations. Think of your neighborhood church Bingo game. —
• Status — it serves as a sort of government badge of approval that a charity is legitimate.

Responsibilities

• Keep Meticulous Records
• File special IRS tax returns such as IRS Form 990 or 990-EZ
• File 1040 tax returns on non-related business activities
• Provide Corroboration for Donor Deduction Claims
• Follow Disclosure Requirements set by Congress and the IRS
• Generate public support in the form of donations
• Avoid unreasonable pay and other benefits for insiders
• Avoid political activity — There is an entirely different set of rules for non-profits dedicated to political activities.
• Keep unrelated business activity to a minimum
• Limit lobbying activity

In order to establish a 501c3 organization, one must fill out a set of forms specified by the IRS. These forms are available on the IRS website. However, the forms are complicated, and it would be best to have the assistance of an attorney when filling them out. The good news is that many law firms will provide this service pro-bono to individuals wishing to form charitable foundations.

It is important to keep a tab on the 501c3 requirements at all times when running a nonprofit organization. Failure to do so can result in losing your 501c3 status, which can have a number of serious side effects. First, it can cause your nonprofit foundation to lose its exemption from income taxes. Even worse, it can cause donors to the foundation to lose their tax deductions on their donations. This can sometimes even work retroactively, depending on the circumstances. Therefore, careful planning and administration are essential when establishing a 501cs corporation, and while operating it.

Charitable Trusts | Privacy Policy | Legal Disclaimer | Contact Us |