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7 Explanations on IRS Charity Requirements – And Why They’re Important

Charitable organizations have played an important role within American culture and society. Whether they are established for charitable, religious, educational, scientific, or other public purposes, they have enhanced and strengthened the American landscape for more than 200 years. Recognizing that incentives were appropriate to support the work of qualifying charitable organizations, Congress introduced the  individual tax deduction for charitable donations one hundred years ago, in the Revenue Act of 1917 and with it, began to introduce IRS charity requirements necessary to qualify for the deduction.

As society has grown more complex, so have the rules and regulations governing charitable organizations. Highlighted below are seven IRS charity requirements – there are others – that govern all U.S. charitable organizations [see IRC § 501(c)(3)].

Requirement 1: Organized Exclusively for Charitable Purpose

To be tax-exempt under § 501(c)(3), the charity must be organized exclusively for a charitable purpose. Generally speaking, the organization must be a corporation (or unincorporated association), community chest, fund, or foundation. An individual may not operate as a charity. The organizing documents must limit the organization’s purposes to those that meet § 501(c)(3) mandates.

Requirement 2: Operated Exclusively for One or More Exempt Purposes

A qualifying charitable organization must engage primarily in activities that accomplish exempt purposes specified in section 501(c)(3). An organization will not be regarded as exempt if more than an insubstantial part of its activities fail to further an exempt purpose.

Requirement 3: Private Benefit Prohibited

A qualifying charitable organization must not be organized for the benefit of private interests. No part of the organization’s net earnings may inure to the benefit of any private shareholder or individual. The qualifying organization may pay its staff reasonable salaries.

Requirement 4: No Excessive Political and Legislative Activities

Section 501(c)(3) organizations are generally prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. The organization may not contribute to political campaigns nor may it sponsor public statements of position (verbal or written) in favor of or in opposition to any candidate for public office. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

No organization may qualify for § 501(c)(3) status if a substantial part of its activities is attempting to influence legislation (commonly known as lobbying).

Requirement 5: Filing Periodic Reports of Activities

While § 501(c)(3) organizations are generally exempt from federal income tax, most qualifying organizations must provide the IRS with information as to their activities, funding, and other exempt efforts. Depending upon the level of contributions received, the organization may be required to file Form 990 (or 990-EZ and 990-N). Failure to file required forms can cause a revocation of the organization’s tax-exempt status. While churches are generally exempt from filing Form 990, they do have employment tax responsibilities.

Requirement 6: Employment Tax Returns

Like other employers, charitable organizations that pay wages to employees must withhold, deposit, and pay employment tax, including federal income tax withholding and Social Security and Medicare taxes. Public charities generally do not pay federal unemployment (FUTA) tax.

Requirement 7: Record-keeping

In general, a charitable organization must maintain books and records to show that it complies with applicable tax rules. It must be able to document the sources of receipts and expenditures reported to the IRS. To the extent that the organization fails to maintain adequate records, it may not be able to show that it qualifies for tax-exempt status.

Mackay, Caswell & Callahan P.C. – Experienced Tax Attorneys

Do you have concerns about the IRS charity requirements as they pertain to your charitable organization? Do you have clear practices in place that meet the IRS charity requirements established by the Internal Revenue Code? Are you burdened by the complexities of rules and regulations that govern § 501(c)(3) organizations? If so, contact one of the Upstate New York tax attorneys or New York City tax attorneys at Mackay, Caswell & Callahan P.C. today. We have more than 30 years’ experience in assisting taxpayers with all sorts of tax-related issues, including those related to tax-exempt organizations. We have offices in Albany, New York City, Rochester, Syracuse, Utica, and Watertown. Don’t delay – we have a New York tax attorney ready to help you with your tax-related issues, so contact us today.