If you’ve ever wondered what makes a nonprofit, well, it’s in the name. But there are different types of nonprofits, especially when you get into the legalities of tax breaks. In fact, because nonprofits are, by definition, not looking to make a profit, they can apply to the IRS to get off the hook for income tax.
Obviously, this tax exemption is a big deal and allows nonprofits to put the money that would have gone to income taxes towards resources that will aid them in their mission instead.
What is a nonprofit?
We sometimes casually throw around the term “nonprofit” and use it synonymously with “charity,” but the truth is that this term refers to organizations that aren’t businesses (literally: not-for-profit). Of course, many of these organizations do serve their communities in charitable ways, but some simply represent credit unions, business leagues, or other organizations that fall under the legal definition of nonprofit.
Broadly speaking, what we think of as nonprofits can fall into these categories:
- Casual or informal charities: These are very small groups of people working to help others, for example, a group of neighbors doing a beach clean up. However, if you plan to raise money or deduct expenses, you need to formalize your group into a corporation.
- Incorporated nonprofits: Creating a corporation is a way for your group to become a formal entity that can have a bank account, take out a loan, and continue to exist even if the leaders in charge change over time. A nonprofit corporation isn’t necessarily tax-exempt, though.
- Tax-exempt nonprofits: A nonprofit organization has to file with the IRS in order to be exempt from taxes (they can only do this if they’ve incorporated first). These types of nonprofits are usually legally categorized as 501(c)s.
Types of Nonprofits
Often, when you’re talking about a nonprofit—like St. Jude’s or the Red Cross—it’s a 501(c). But there are many different types of 501(c) organizations! There are also other types of 501 statuses, like 501(d) (religious and apostolic organizations) or 501(k) (publicly-available child care organizations). Below we’ll give a brief overview of each of the 501(c) nonprofit types, but you should consult IRS tax exemption materials for more information, especially if you’re researching to see whether your organization can apply for 501 status.
- 501(c)(1) – These are corporations organized under an act of Congress, including federal credit unions, federal reserve banks, and other corporations that are instruments of the US government.
- 501(c)(2) – Corporations that are organized for the exclusive purpose of holding title to property whose profits go towards another 501(c) corporation.
- 501(c)(3) – These are charitable, educational, or religious organizations like churches, elderly care homes, and after-school clubs for at-risk youth.
- 501(c)(4) – Social welfare nonprofits can file for this status. This can include organizations that lobby and get involved in politics as long as their work benefits a community rather than private groups or individuals.
- 501(c)(5) – These are agricultural organizations, including horticultural and farm labor organizations.
- 501(c)(6) – Business leagues like chambers of commerce or boards of trade.
- 501(c)(7) – These are social or recreational clubs like alumni associations or country clubs.
- 501(c)(8) – Lodges, fraternal orders, and societies that pay life or accident insurance or other benefits to members in addition to hosting social activities.
- 501(c)(9) – Voluntary employee organizations, like a (non-mandatory) union or other group that works for the same employer, which pay life, sickness, and accident insurance to members.
- 501(c)(10) – These are organizations related to lodges or social organizations’ charitable wings.
- 501(c)(11) – These are teachers’ retirement fund organizations.
- 501(c)(12) – Members of these types of nonprofits receive life insurance, irrigation, phone service, and other services at the lowest possible cost.
- 501(c)(13) – This type of nonprofit includes cemeteries or other organizations that deal with burial or cremation (although they cannot be mortuaries).
- 501(c)(14) – These are state-chartered credit unions or other mutual financial organizations.
- 501(c)(15) – These are small insurance companies that offer each other mutual benefits and offer members insurance and other services at cost.
- 501(c)(16) – These finance agricultural organizations; for example, a farmers’ cooperative association helps fund equipment, crops, warehousing, etc.
- 501(c)(17) – These are trusts created to pay supplemental unemployment compensation benefits regardless of the employee’s salary.
- 501(c)(18) – These are pension trusts funded only by employees and started before June 25, 1959.
- 501(c)(19) – These nonprofits are veterans organizations that provide insurance and other services to past and present veterans.
- 501(c)(21) – Black Lung (or pneumoconiosis) trusts provide for medical treatment for miners suffering from this disease, as well as benefits for their widows.
- 501(c)(22) – These nonprofits are organized by the US government to provide liability funds to employers who are withdrawing funds from multiemployer pensions.
- 501(c)(23) – These are specifically veterans organizations that were formed before 1880.
- 501(c)(25) – This status applies to title-holding corporations or trusts for multiple parent corporations.
- 501(c)(26) – This status is for state-organized entities that provide insurance or services to high-risk individuals.
- 501(c)(27) – These are state-sponsored workers’ compensation organizations.
- 501(c)(28) – This relatively new (since 2002) status applies specifically to the National Railroad Retirement Investment Trust.
- 501(c)(29) – The Affordable Care Act created this status for nonprofit health insurance issuers who receive loans or grants under Medicare or Medicaid
Fun Fact: Did you notice there’s no 501(c)(20) status? That’s because this designation for qualified group legal services plans was discontinued in 1992 when it was decided these organizations could be folded in with 501(c)(9) voluntary employee benefits associations. There’s also no 501(c)(24), as this provision for single-payer benefit trusts was repealed by the Pension Protection Act of 2006.
If you’re trying to decide whether or not to apply for 501(c) status, you should do your homework. Although there are clear benefits to tax exemptions, you will be committing to ongoing paperwork as well as, possibly, increased scrutiny. You will be upheld to specific standards no matter what type of nonprofit status you apply for. Consider examining the IRS’s guide to applying for 501(c) exemption to get a better idea of whether your organization is ready for this step.
Top image credit: Claudia Raya, Unsplash
