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Pros & Cons of 
501(c)(3) Status

 

501(c)(3) Organizations Enjoy the Following Privileges:

Exemption from Federal Income Tax
Exemption from F.U.T.A. (federal unemployment tax)
Tax Deductibility for Donors
Eligible for Government & Foundation Grants
Eligible for Bulk Mailing Permit
Gambling Permits (in some jurisdictions)
Credibility

501(c)(3) Organizations Must Fulfill the Following Responsibilities:

Keep Adequate Records
File Required Returns
Provide Donor Substantiation
Obey Disclosure Laws
Generate Public Support
Avoid "Excess Benefits" for insiders
Shun Political Activity
Limit Legislative Activity
Limit Unrelated Business Activity

For more about the responsibilities of 501(c)(3) organizations, please
scroll down and follow the links to Keep the IRS Happy.

The chart below summarizes various kinds of tax
treatment for nonprofit and for profit organizations for
comparison purposes.

 

Type of TaxFor ProfitNon-Profit
Income TaxSole proprietor files Form 1040, Schedule C, and pays income tax on net profit. Corporation files form 1120, and pays income tax on net profit; employees file Form 1040 and pay income tax on salaries received501(c)(3) non-profit files Form 990, 990-EZ, or 990-N and pays income tax only on net profit from unrelated activities; employees of the non-profit file Form 1040 and pay income tax on salaries received

Payroll TaxesSole proprietorship or corporation files quarterly 941's and annual 940, W-2's and W-3Nonprofit files quarterly 941's and annual W-2's/W-3, but 501(c)(3) organizations don't pay FUTA tax (Form 940)
Charitable ContributionsGrantors and contributors are not able to take a charitable contribution deduction for cash or goods donated to an individual or to a for-profit organizationGrantors and contributors are permitted to take a charitable contribution deduction for cash or goods donated to a 501(c)(3) organization



Have more questions about Form 1023?  Visit www.501c3Book.com 
for information about Sandy Deja's book, Prepare Your Own 501(c)(3)
Application. (Available only as an ebook.)

This page last updated April, 2011.