How to Protect a 501 C 3 Status

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Many organizations that operate for a charitable purpose apply to the Internal Revenue Service to become a 501(c)(3) organization. The chief benefit of being a 501(c)(3) is that donations to the organization may be tax deductible. Since this can boost the organization’s income, protecting the 501(c)(3) status is very important. Hundreds of organizations lose their 501(c)(3) status every year, often unnecessarily.

Filing Requirements

A 501(c)(3) organization must satisfy the annual filing requirements of the IRS. Even though the organization is exempt from paying taxes, it must still file a federal tax return. Organizations with revenues less than $50,000 can file a 990EZ, also known as an e-Postcard. Larger organizations must file a 990. Organizations that fail to file for three years in a row automatically lose their 501(c)(3) status.

Political Activities

Engaging in political activities can jeopardize a 501(c)(3) status. 501(c)(3) organizations must not participate in political elections for local, state, or federal offices. They must also limit their lobbying activities to an “insubstantial” part of their total activities. Interpretations of “insubstantial” have varied over the years. Given the vagueness of the law, you should consult an attorney or an online legal provider if your organization intends to engage in lobbying activities.

Charitable Purpose

When an organization initially applies for 501(c)(3) status, it must declare a charitable purpose. Deviating from the organization’s stated charitable purpose can jeopardize its tax status. The activities of the organization must exclusively serve its charitable purpose. For example, an organization whose stated purpose is assisting autistic children might place its tax-exempt status at risk if it serves hyperactive children, instead.

Insurance Issues

The 501(c)(3) must not provide commercial-type insurance as a substantial part of its activities. For example, if an organization hosts a fundraising gala, it can protect their nonprofit status by looking to other commercial insurers to provide insurance for that event. The organization must not self-insure. The rational is that the organization would be putting assets that are supposed to be used for charitable purposes at risk if it self-insures.

How Often Must You Renew a 501(c)(3)?

Running a nonprofit organization requires strict adherence to both state and federal laws. And if your organization pursues federal 501(c)(3) tax exempt status, you must go through a cumbersome application process with the Internal Revenue Service. However, once you have been approved, your organization does not need to renew its 501(c)(3) exemption.

Filing Requirements

Although your organization's 501(c)(3) status does not need to be renewed through the IRS, there are other filing requirements that you must observe in order to continue to legally operate. Specifically, the IRS requires you to file an annual report outlining your yearly revenue and activities. You must also comply with any specific state reporting and registration requirements. Failure to do so could result in loss of the exemption and corporate status.