When tax season rolls around each spring, a new crop of questions may arise concerning clients’ gifts to various organizations and whether those donations qualify as tax-deductible charitable contributions.
Section 501(c) of the Internal Revenue Code lays out the requirements for organizations to be considered tax-exempt—a status for which an organization must seek IRS approval. Tax exemptions apply to certain types of nonprofit organizations, but status as a nonprofit (which is a state law construct) does not necessarily mean that the organization will be exempt from Federal income taxes.
Furthermore, even under Section 501(c), there are different types of nonprofits that are recognized by the IRS as tax-exempt. To qualify under the Internal Revenue Code Section 170 charitable deduction for gifts to Section 501(c)(3) organizations, for example, the recipient must be organized and operated exclusively for “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.” “Charitable,” according to the IRS, has a very narrow definition.
You might support 501(c)(3) charities, but also social welfare groups organized under Section 501(c)(4). Examples of social welfare groups include neighborhood associations, veterans’ organizations, volunteer fire departments, and other civic groups whose net earnings are used to promote the common good. Donations to social welfare groups are tax deductible only in certain cases (e.g., gifts to volunteer fire departments and veterans’ organizations). Chambers of commerce and other business leagues fall under Section 501(c)(6); donations to these entities are not tax deductible.
One major advantage of having a fund with Arkansas Community Foundation is that we are a 501(c)(3) nonprofit and a gift to a charitable fund or endowment with us is fully tax deductible. And, when you or your clients want to grant out of that fund or endowment, we will do the research and vetting to make sure the organization qualifies to receive the grant as a charitable entity. If you have any questions, please reach out to our team at the Community Foundation. We are immersed in the world of Section 501(c) and are happy to help you navigate the rules.