According to the Internal Revenue Service (IRS), there are 32 different types of tax-exempt organizations that can have a significant impact on your community. The detailed list in this blog will give you a better idea of where your organization fits in and which federal benefits you can receive.
Ask one hundred people what a nonprofit is, and you will get one hundred different answers. This confusion may be because of the variety of types of nonprofits. And the name nonprofit itself can be confusing. While most people assume nonprofits are charitable organizations, many different types of organizations are classified under this title. The detailed list in this blog will give you a better idea of where your organization can fit and what federal benefits you can receive.
Before we begin, let us explain what a nonprofit is and as per the IRS, how it must operate.
A nonprofit is a legal entity that is created and operated for a collective, public, or social benefit.
There is a common misconception that nonprofits do not make money. This is an understandable assumption based on the name, but the reality is a bit different. Many nonprofits make quite a bit of money and are big businesses. In fact, nonprofits are America’s third-largest employer. However, they do not make a profit year over year.
Nonprofits include more than the homeless shelter or food pantry down the street; the term also includes your nearest hospital, church, library, and Chamber of Commerce, to name only a few. According to the Internal Revenue Service (IRS), there are 27 different types of 501(c) and five other categories of organizations beyond this. These organizations are exempt from federal income taxes and have a significant impact on your community.
The one rule that all nonprofit organizations must follow to remain tax-exempt is not paying out profits. The IRS states that “no part of the organization’s net earnings can benefit any private shareholder or individual.” This means no shareholders can get rich from the organization.
In some states, nonprofits are allowed shareholders, but these individuals do not take a salary. Instead, they are often organization founders who hold onto control over the organization through their shares and voting power.
Now that we have cleared up what a nonprofit is, we can move on to the list of nonprofit types. The IRS has granted federal tax exemption to a variety of nonprofits. These organizations range from public charities and private foundations to trade associations and pension funds.
The IRS publication 557 provides details on each of these categories.
Federal credit unions are the best example of this type of organization. A 501(c)(1) organization is not required to apply for tax-exempt status or fill out annual tax returns because they were organized by Congress. Those making contributions to this type of nonprofit can get tax breaks as long as their donation is exclusively for public purposes.
This type of 501(c) only qualifies for a tax exemption through its connection with other tax-exempt organizations. An owner of a title-holding corporation must turn over the entire income of the property, minus expenses, to one or more tax-exempt organizations.
501(c)(3) is the most popular nonprofit type. These nonprofits are either public charities or private foundations and must apply for tax-exempt status with the IRS and their home state. These organizations also must file 990 tax returns every year. Those who fail to file for over three years will be in danger of losing tax-exempt status.
If you are interested in starting a 501(c)(3) organization, you should also check out the 501(c)(3) donation rules beforehand.
Examples of well-known 501(c)(3) nonprofits include Habitat for Humanity, Make-a-Wish Foundation, Nomi Network, Healthcare for the Homeless, Word on Fire Catholic Ministries, Voices of Our City Choir, and so many more.
Here’s a glimpse into Voices of Our City Choir‘s website donation page using the embeddable Donorbox recurring donation form to accept donations.
501(c)(3) organizations must operate as a corporation and are further broken down into the following:
To qualify as a publicly funded 509(a)(1) charity, the organization will generally pass the one-third support test.
Organizations pass the one-third support test if over five years, at least one-third of their total support comes from public sources like gifts, grants, and other public contributions. Examples of this type of organization are schools, churches, and hospitals.
Under this section, organizations that qualify for 509(a)(2) tax-exempt status receive funds from gifts, grants, contributions, and fees for their service. An example of this type of organization is a therapy center that provides services to the community and raises funds through events and fundraising campaigns.
While 509(a)(3) is not a public charity, it is tied to nonprofits that are. Foundations for universities, hospitals, libraries, fire departments, and police stations can gain tax-exempt status under this section.
509(a)(4) public safety charities are not foundations or public charities. There are no public support requirements for this type of organization. Instead, they must meet the tests required for public testing.
Private foundations may not fit any of the above qualifications but can gain tax-exempt status through this section. Private foundations usually rely on one source of income, commonly an endowment or fund. These organizations must focus on giving grants to other public charities.
501(c)(4) organizations concentrate on social welfare. The members of these organizations must be in one location, work for the same employer, or have a similar connection. Net earnings of these organizations must also be for charitable, educational, or recreational purposes.
Many Super PACs qualify for tax-exempt status under this section of the tax code. These groups can remain tax-exempt through their goals of “educating the population on specific social welfare issues.” The National Rifle Association (NRA) is organized as a 501(c)(4).
501(c)(4) organizations do not have to disclose their donor list. This has made 501(c)(4) status very popular.
Some may wonder why the IRS has two separate sections for political organizations. The difference between the two is mainly in what they must report.
527 organizations are parties, committees, funds, or associations created to accept donations directly or indirectly. They can raise unlimited amounts but cannot influence the election of candidates. They also must disclose donor names.
Learn about the differences between 501(c)(3) and 501(c)(4) organizations here.
501c(c)(5) qualifies for both labor and agricultural organizations with tax-exempt status. Labor organizations must promote their members’ interests through collective bargaining with their employers to gain this status.
Agricultural and horticultural organizations must work with animal or vegetable life, not minerals. Their primary purpose must also be to better the conditions of those working in these areas, develop more efficiency, or improve their products.
A few examples of this type of organization are groups that exhibit livestock or farm products, organizations that test soil for farm bureau members, and associations that negotiate crop prices.
Chamber of Commerce, Board of Trade, Real Estate Boards, and Professional Football Leagues are all tax-exempt under the 501(c)(6) section of the tax code. These organizations are either located in the same city or are engaged in a similar line of business. They also must focus on business improvements.
A great example of a 501(c)(6) organization is The American Solar Grazing Association (ASGA). Here’s a snapshot of their donation page hosted by Donorbox for free.
College fraternities, sororities, country clubs, amateur hunting, fishing, tennis, swimming, and dinner clubs all qualify for the 501(c)(7) tax-exempt status.
Because of this status, several regulations must be followed:
Notable examples of 501(c)(7) organizations include The Rolla Alumni Chapter of Beta Sigma Psi and the OX Epsilon Chapter.
Fraternal societies like the Elks Lodge, Knights of Columbus, and Freemasons have been around for centuries.
To retain their 501(c)(8) status with the IRS, these organizations must:
501(c)(8) organizations can only collect tax-deductible gifts from individuals if they are used for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. Gifts for fraternal or social purposes are not deductible.
Under the 501(c)(8) section of the tax code, these societies can pay life, sick, and accident insurance and other benefits for their members and their dependents.
VEBA are voluntary groups of employees who pay for other members’ life, sick, and accident insurance along with other benefits. These benefits can also go to members’ dependents and beneficiaries. These organizations must be connected through employment or membership in a labor union, and the purpose must be only to provide benefits.
Restrictions for these organizations include a non-discrimination requirement. Higher-paid employees cannot benefit more than the rest.
In addition to providing benefits for their own members, fraternal societies have a history of collecting donations to support others in their community and worldwide. Through section 501(c)(10), domestic societies can collect funds to support religious, charitable, scientific, literary, educational, and fraternal goals.
The IRS created 501(c)(10) as a separate category from 501(c)(8) for fraternal societies that do not provide insurance for their members. The Masons are an excellent example of an organization that solely collects funds for charitable purposes.
Teacher’s retirement fund associations are organized locally and pay retirement benefits for teachers and other school employees. These organizations are funded through taxes, member donations, and investment revenue.
The goal of this tax exemption is to provide services to members at the lowest possible cost. These organizations must collect at least 85% of their income from their members.
501(c)(13) cemetery companies are also tax-exempt under the Internal Revenue Code. These companies can remain tax-exempt while paying operating and maintenance costs. They can also spend funds on cemetery or crematorium improvements and new property.
Here’s an example of a 501(c)(13) organization using the Donorbox recurring donation form to accept donations for their cemetery support.
Credit unions are tax-exempt from federal income taxes under 501(c)(14). These organizations receive tax-exempt status because they benefit members and serve as sources of credit for low- and moderate-income populations.
Small insurance companies can also gain tax-exempt status with 501(c)(15). These companies are usually based in small communities and are mutually beneficial. These organizations provide insurance to members at cost and offer necessary services like property damage, burial, and funeral benefits.
Farmers’ cooperative marketing or purchasing associations can claim tax exemption if they are in conjunction with the farmers’ cooperative association. The activities covered under 501(c)(16) include the funding of farm equipment, crop cultivation, livestock, warehouse, shipping, and marketing.
A supplemental unemployment benefit trust can be tax-exempt if it exists solely to pay for supplemental compensation benefits and does not discriminate. This tax exemption must be applied for with 1024 applications, and contributions are not tax-deductible.
Pension trusts created before June 25, 1959, are tax-deductible under this statute. They cover benefit payments for unemployed members. These pension trusts are fully funded by employees.
All veterans’ organizations organized in the United States are tax-exempt under 501(c)(19). These organizations must improve the lives of veterans or current members of the Army, Marine Corps, Air Force, Navy, Space Force, or Coast Guard. To remain tax-exempt, at least 75% of the organization’s members must be past or present members of the armed forces. 97.5% of their membership must be Armed Forces veterans, spouses, widows or widowers, or ancestors of these individuals.
The Forty & Eight is a notable veterans’ organization running the below online campaign to raise funds for their nurses’ training program.
The Federal Black Lung Benefit Act was passed by Congress in 1969. It forced coal mine operators to pay benefits to miners who suffered from the disease because of long-term exposure to coal dust. In 1977, Congress amended the code to create a trust fund for these benefits. These trusts are funded by coal mine operators and pay premiums for insurance, accident and health benefits for coal miners and their spouses, and administrative and incidental expenses.
This tax exemption was created to provide funds to meet employers’ liability withdrawing from a multi-employer pension fund.
Veterans’ organizations created before 1880 are tax-exempt under 501(c)(23). 75% of members must be past or present members of the armed services.
This type of nonprofit must be a corporation or trust. They are to exclusively acquire, hold title to, and collect income from real property. They must turn over the entire amount, minus expenses, to tax-exempt organizations. Unlike title holders for single-parent corporations, these companies can have up to 35 shareholders or beneficiaries.
These membership organizations must be established by the state and provide care to high-risk individuals. They will either issue insurance or enter arrangements with HMOs to provide service.
This tax exemption splits organizations into two groups.
This section provides tax exemption to organizations formed before June 1996. These nonprofits also exclusively reimburse their members. These members are all individuals and government entities that issue insurance against workers’ compensation losses.
The second group consists of organizations formed after December 1997. These organizations are created by state law and provide workers’ compensation.
The Railroad Retirement and Survivor’s Improvement Act of 2001 created this organization to manage and invest the railroad retirement account assets. The purpose of this act was to diversify these investments.
As part of the Affordable Care Act, all qualified nonprofit health insurance issuers who received a loan or grant under the Medicare and Medicaid services co-op program are tax-exempt.
This tax exemption was initially for the Shakers and similar religious groups. These groups must share all income in a community account. These associations are often farming or manufacturing communities. The community owns all property.
These cooperatives perform data processing, purchasing, warehousing, billing, collection, food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel services for hospitals. Organizations qualify for this tax exemption if they provide these services to two or more tax-exempt hospitals.
Cooperatives are tax-exempt if they invest the money pooled from members of operating educational organizations and return the income to said members.
In 1984, Congress added a section to the Internal Revenue Code to include certain child-care organizations as tax-exempt. These organizations gain tax exemption by allowing parents of children the opportunity for “gainful employment.” At least 85% of the services provided should be for working parents in the general population, not for specific employers.
Charitable risk pools combine certain insurance risks, other than medical malpractice, of 501(c)(3) organizations. They must also provide information on loss control and risk management. All members of these pools must be tax-exempt.`
With so many kinds of nonprofits, it can be difficult to know which section of the tax code fits your organization. We hope that our explanation of each kind makes this process easier for you!
Please note that nonprofits can raise funds through membership dues, grants, charitable gifts, investments, and more. The only common denominator is that all nonprofit organizations must reinvest their income back into the organization.
Need more insights? Get a list of helpful articles on “starting a nonprofit” here.
As you further research these types of nonprofits and find where your organization fits, Donorbox is here to help with your fundraising efforts. Learn about our simple-to-use features such as Recurring Donations, Crowdfunding, Peer-to-Peer fundraising, Events, Memberships, and more. We also help nonprofits with a simple and effective donor management system.
If you think you need expert help or coaching with your fundraising efforts, Donorbox Premium is there for you! You’ll get a fundraising coach, a dedicated account manager, tech support, and high-performance tools – all at an affordable package.
Read insightful tips, resources, fundraising ideas, and more on the Donorbox Nonprofit Blog.
Kristine Ensor is a freelance writer with over a decade of experience working with local and international nonprofits. As a nonprofit professional she has specialized in fundraising, marketing, event planning, volunteer management, and board development.
Subscribe to our e-newsletter to receive the latest blogs, news, and more in your inbox.
Kristine Ensor