501(c)What? Understanding the Nonprofit Tax Lingo

woman understanding tax lingo

Every sector has its lingo, and in the nonprofit world, a lot of it has to do with taxes. In fact, there’s an entire section of the tax code devoted to nonprofit organizations: Section 501(c) of Title 26, to be exact.

You don’t need to be a tax expert to be involved with a nonprofit organization, whether that’s as a donor, board member, volunteer, or employee. But knowing some of the basic tax terms can certainly help you to better navigate the nonprofit world.

Full disclosure: We’re going to get into some legalese in this post, but we’re not lawyers, nor are we offering legal advice.

We’ve tried to keep it easy to read by framing this content through a few simple questions you may already be wondering.

What is a 501(c)3 organization?

Most nonprofit organizations in the U.S. are 501(c)3 organizations, meaning they are organized and operated exclusively for charitable purposes. Examples include religious organizations, private foundations, and nonprofit organizations with educational purposes.

Bolder Advocacy, an initiative of Alliance for Justice, provides guidance to nonprofit organizations to help them navigate the legal rules around their electoral engagement and legislative advocacy. In short, 501(c)3 organizations:

  • Must be nonpartisan, meaning they cannot endorse, contribute to, or take any other actions aimed at electing (or defeating) any candidate for elected public office;
  • Can conduct nonpartisan election activities, such as voter registration (as long as it is not in service of a specific candidate) and public education about the issues; and
  • Can advocate for or against specific legislation but must limit the time they spend on lobbying.

What does it mean when I hear that my donations to 501(c)3 organizations are tax-deductible?

For fundraising professionals at many 501(c)3 organizations, “busy season” happens in the last few weeks of the calendar year. That’s because donations to 501(c)3 organizations are tax-deductible, meaning that donors can deduct the donation amount from their income when they file their federal taxes (as long as they itemize their returns). The more deductions you have (charitable and otherwise), the lower your federal tax bill, so many people try to maximize their deductions before the end of the year.

The new tax law passed in December 2017 didn’t change the charitable deduction, but some worry that the law may reduce charitable giving because fewer people are expected to itemize their taxes.

The Council on Nonprofits offers resources to help nonprofits understand the law’s impact and consider adjusting fundraising strategies accordingly. There’s a lot to consider, but ultimately, the end of the year will probably still be busy, both for fundraising professionals and donors’ inboxes, since the charitable deduction still exists.

Are all nonprofits 501(c)3 organizations?

No—in fact, there are 29 types of nonprofit organizations under section 501(c) of the tax code. The ones you’re most likely to encounter include:

  • 501(c)4: Often known as social welfare organizations, 501(c)4 organizations are allowed to endorse candidates and make political expenditures in partisan elections, as long as their primary activity in doing so is the “promotion of social welfare” and is related to the organization’s purpose. You can often spot a 501(c)4 organization by the word “action” in its name, such as the NRDC Action Fund and Food Policy Action.
  • 501(c)5: Labor unions and related organizations such as the Solidarity Center are classified as 501(c)5 organizations. Organizations that promote agriculture and horticulture, and the interests of people engaged in these occupations, also qualify as 501(c)5 organizations.
  • 501(c)6: Chambers of commerce, business leagues such as the Washington International Trade Association, and real estate boards use this tax designation. Until 2015, the National Football League (NFL) filed with the IRS as a 501(c)6 organization.

How can I use this information as a non-tax professional?

Understanding the different types of nonprofit organizations can help you figure out where you want to work. For example, if you’re passionate about electoral campaigns, then a 501(c)3 organization may not be the right fit for you, unless you’re okay with staying neutral while you’re on the clock.

Knowing the tax lingo can also give you a leg up in your job search. A key part of interview prep is to research the organization, and understanding their tax status can give you greater insight into how an organization operates.

Pro Tip: To go deeper, look at the organization’s Form 990. This form is filed with the IRS annually and provides a lot of information, including the organization’s expenses, revenue, and assets.

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How will you use your new understanding of nonprofit tax lingo?

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As a nonprofit advocacy professional living in Washington, D.C., Deborah works with groups across the country to educate their communities and lawmakers about public policies that can help low-income residents make ends meet. She is passionate about helping people connect their interests to a cause they believe in and empowering them to take action.
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