July 2018 – Rick Szilagyi, Principal
Not unlike other industries, the nonprofit world has its share of jargon. Also not unlike other industries, there is broad-based confusion. Terms are used interchangeably that shouldn’t be, and misleading verbiage abounds where you least expect it – even on some state websites.
Nonprofit, tax-exempt, and 501(c) designation are best thought of as three distinct terms:
- “Nonprofit status” refers to status under state law.
- “Tax-exempt status” refers to federal income tax exemption under IRS code and to certain state taxes.
- “501(c)” refers to that section of the Internal Revenue Code for tax-exempt organizations.
We routinely hear and even see on some government websites, the inappropriate use of “nonprofit” and “501(c)(3)” as if they are synonymous. All 501(c)(3) organizations are nonprofits; however, not all nonprofits are 501(c)(3) organizations. While the greatest number of tax-exempt organizations are 501(c)(3)s, there are more than two dozen types of nonprofit organizations. These include other common designations, such as 501(c)(6) organizations (chambers of commerce, trade associations, and so on).
501(c) designations carry with them rules for lobbying, how donations may be handled from a tax standpoint, etc. As it is not unheard of for longstanding nonprofits to be classified incorrectly, it is important to understand the different types of 501(c) and to know which is the best fit for your organization.
The Lexian Management newsletter is for informational purposes only.
Always consult your attorney, accountant, and/or insurance provider to obtain advice with respect to any particular issue or concern.