Many people are familiar with the “501(c)(3)” nonprofit designation. But what many don’t realize is that Section 501(c)(3) of the Internal Revenue Code is just one of many tax law provisions granting exemption from the federal income tax to nonprofit organizations. Another common designation is the 501(c)(6) nonprofit. For each type of exemption classification, varying rules and requirements may apply. The following information will help nonprofits and donors understand the distinction between these two types of nonprofit organizations, 501(c)(3) and 501(c)(6), including important tax deduction consequences.
501(c)(3) exemptions apply to entities organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (e.g. NCAA).
Donors who make charitable contributions to most types of 501(c)(3) organizations generally are afforded a charitable deduction under section 170 of the Internal Revenue Code. Regulations specify the applicable requirements for donors to claim such deductions (e.g., receipts for donations over $250).
A 501(c)(6) is specifically reserved to business leagues. A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are business leagues. To be exempt, a business league’s activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons. 501(c)(6) organizations are exempt from most federal income taxes. However, donations to a 501(c)(6) are not tax deductible as charitable contributions, as is the case with a 501(c)(3). Donations to 501(c)(6) organizations are not required to be disclosed.
Here’s a side-by-side comparison of key characteristics of 501(c)(3) and 501(c)(6) nonprofit designations:
Note: this blog post contains general advice. Please consult your own attorney or accountant with specific legal and tax issues.