IRS Classifications for Nonprofit Organizations - dummies

IRS Classifications for Nonprofit Organizations

By Stan Hutton, Frances Phillips

Nonprofit organizations can be formed under the IRS code for many reasons other than charitable ones. To give you a taste of the variety of these organizations, the following list summarizes various classes of nonprofit organizations:

  • 501(c)(3): These organizations are formed for educational, scientific, literary, charitable, or religious pursuits and also to test for public safety and to prevent cruelty to children and animals. Nonprofits in this category may be classified as public charities or private foundations; the source of support for the organization usually determines the classification. Foundations are subject to additional reporting requirements. Contributions to these organizations are tax deductible for the donor.

  • 501(c)(4): These organizations are known as social-welfare organizations because they’re formed for the common good of the people. Advocacy groups tend to fall into this category because organizations with this classification are allowed more leeway to lobby legislators as a part of their mission to improve the general welfare. Certain employee organizations also come under this classification. Contributions to these organizations aren’t deductible for the donor.

  • 501(c)(5): Labor unions and agriculture and horticulture organizations formed to improve conditions for workers are in this category. These groups also may lobby for legislation.

  • 501(c)(6): Business and trade associations that provide services to their members and work toward the betterment of business conditions are placed in this classification. This category includes chambers of commerce and real estate boards, for example. Again, lobbying for legislation is allowed.

  • 501(c)(7): This section covers social clubs formed for recreation and pleasure. Country clubs and organizations formed around a hobby come under this classification. These organizations must be funded primarily by memberships and dues.

  • 501(c)(9): This type of nonprofit is an employees’ beneficiary association that’s created to pay insurance benefits to members and their dependents. It must be voluntary, members must have a common bond through employment or a labor union, and in most cases, it must meet nondiscrimination requirements.

Several other 501(c)-type organizations are so specialized in nature that they aren’t covered here. One of our favorites is the 501(c)(13), which covers cemetery companies.

Political action committees (PACs) and parties have their own special classification, too. They’re recognized under IRS code section 527 and are organized for the purpose of electing persons to office. They have special reporting requirements and aren’t required to be incorporated. Donations to these organizations are not tax-deductible.

To get the full flavor of the various categories of nonprofit organizations, check out the IRS website or review IRS Publication 557.