Section Library
501 (c)(3) Non Profits
Section 501(c) of the Internal Revenue Code classifies tax exempt organizations into 25 separate categories. Each category is treated differently, and classification in one category rather than another can make a significant difference to an organization's tax liabilities and responsibilities. The American Water Works Association and its sections are exempt under section 501(c)(3) of the code. All AWWA sections get their 501(c)(3) status through a group exemption. This is, in essence, an extension of the Association's 501(c)(3) status to all our sections.
Organizations which are exempt under section 501(c)(3) are usually defined as "charitable" or "educational." These organizations are defined as being organized and operated exclusively for religious, charitable, scientific, testing for the public safety, literary or educational purposes. As a non-profit organization, no part of their net earnings may inure to the benefit of any private individual.
Advantages to Classification as a 501(c)(3) Organization
- Exempt from tax on dues, interest, dividends, royalties, rents and any other income which is not derived from the conduct of an unrelated trade or business.
- In most states a 501(c)(3) organization is eligible for an exemption from most state taxes, including sales and real estate tax.
- May receive contributions deductible from the taxable income of the donor.
- May sponsor 403(b) retirement plans for their employees.
- Eligible for the third-class postal rate.
The requirements for obtaining and maintaining a section 501(c)(3) exemption may be summarized as follows: an organization carrying out educational, charitable, or religious activities, rather than an organization which serves the business interests of a particular profession/industry; if the organization does not exceed limitations imposed on lobbying and propaganda expenditures imposed by section 501(c)(3) and/or section 501(h), and if the organization engages in no activity intended to influence the election or defeat of any political candidate.
Disadvantages
- A prohibition against all political activities (other than lobbying) for most exempt organizations.
- Some limitations on the amount of lobbying expenditures and activities of organizations exempt from taxation under 501(c)(3).
- Complex restrictions on certain transactions and complex compliance requirements on organizations deemed to be private foundations.
- Criticism from the for-profit sector for unfair competition.
- A growing Federal, state, and local compliance burden including income tax and informational filings and Federal, state, and local solicitation laws.
- Increased public scrutiny.