The Many Types of Tax-Exempt Organizations

The tax rules authorize over 25 different types of tax-exempt organizations. Your credit union might be a 501(c)(14), while your child’s daycare might be a 501(c)(3). Such designations are significant because they determine permissible activities, filing requirements, and eligibility to accept tax-deductible contributions.

Section 501(c)(3) Organizations
Nonprofits that are organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes can obtain tax-exempt status under Section 501(c)(3). Also under Section 501(c)(3)’s umbrella are nonprofits engaged in testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.

With the exception of organizations that test for public safety, 501(c)(3) organizations are both exempt from federal income tax and eligible to receive tax-deductible contributions. Political and legislative (lobbying) activities are restricted.

Other Types
While Section 501(c)(3) organizations are the most prevalent types of tax-exempt entities, others include:

• Social welfare organizations, civic leagues, and local associations of employees that serve charitable, educational, or recreational purposes - Section 501(c)(4)

• Trade associations, professional associations, chambers of commerce, and other business leagues - Section 501(c)(6)

• Social and recreation clubs - Section 501(c)(7)

• Fraternal societies - Sections 501(c)(8) and 501(c)(10)

• Veterans organizations - Sections 501(c)(19) and 501(c)(23)

Most, though not all, of these organizations are prohibited from taking tax-deductible contributions.

Caution Required
An organization can be formed as a nonprofit corporation under state law but not qualify as a tax-exempt organization under federal income tax law. And, even a tax-exempt organization can owe federal income taxes if it has “unrelated” trade or business income.