Organizations that apply for a 501c3 status through the IRS and/or their state are doing so because they want to achieve the tax exempt status that comes along with the designation. When the 501c3 status applies at the state and national level, then no taxes on income generally need to be paid. Tax filings still have to be made and there may be certain taxation exceptions that don’t completely eliminate taxes altogether, but there will be a lower or zero responsibility.
Here are some of the other benefits of 501c3 status to consider for organizations that are primarily nonprofit in their structure or design.
1. It allows the organization to accept donations and contributions that are tax deductible to those who donate.
Although most states require an organization to apply for the ability to accept donations, the 501c3 status allows for this application to occur. Once approved, then all donations that are given without an equal service provided are generally considered to be tax deductible. Here are some examples to consider.
- A donor who makes a contribution of $100 with nothing in return can deduct $100 on their taxes.
- A donor who contributes $100 to receive a CD valued at $15 can deduct $85 on their taxes.
- A donor who walks into a retail outlet run by a nonprofit and spends $100 on merchandise can deduct nothing on their taxes.
This benefit encourages people to donate to a good cause that is local in nature because the services benefit the community and the donation is potentially tax deductible. That creates a good winning combination.
2. It provides discounts on services provided by the government.
Another key benefit of having the 501c3 status being awarded is that it allows the organization to begin utilizing discounts on US postal rates. There are discounts provided on the bulk mail rates and other services that are provided.
The national government isn’t the only one that provides organizations with the 501c3 status with discounts. There may be no property taxes or valuation considerations on assets that lower a company’s overall responsibilities. There may be membership fees waived for state-sponsored associations, training seminars, or other events.
3. It provides legitimacy.
After the fiasco of the 2007-2009 Great Recession, consumers have become much more aware of what causes they decide to support. They don’t want to just throw their money away to someone who is going to spend it on margaritas and tropical beach vacations. The 501c3 status provided by the IRS and certain states provides a higher level of legitimacy that allows donors to have confidence in the value of the company receiving their donation.
4. There are higher thresholds in place for unemployment taxes and other liabilities.
The cost of doing business in the modern world means having insurance in place for workers’ compensation claims, unemployment taxes that may need to be paid, and other social programs or services that are designed to protect workers. The 501c3 status often providers a higher threshold that must be met before costs begin to kick in, giving the nonprofit an added buffer for their budget.
5. It allows for an organization to apply for certain grants and public allocations.
There are a number of monetary grants and allocations that are only available to organizations that have been recognized by the IRS as having a 501c3 status. Although no grant or monetary allocation is 100% guaranteed, the chances of receiving these funds is a lot higher than not having the 501c3 status and having no chance at the cash whatsoever.
6. There could be fringe benefit discounts.
Many organizations that provide and distribute employee benefits have discounts in place for companies that have been given the 501c3 status from the IRS. This might include discounts on healthcare premiums, advertising discounts, or reduced fees on retirement plan administration costs. Certain 501c3 organizations [churches] there are certain tax benefits on income, especially for employees and this can apply to an entire group of churches.
7. There’s also the Emerson Good Samaritan Act that applies.
A 501c3 status also provides coverage under this law which allows organizations to be exempt from criminal or civil liabilities when they make donations of food to nonprofits. As long as the food meets labeling standards and is food that is considered to be “apparently wholesome,” the organization cannot be held responsible for food-related illnesses or injuries.
There are a number of 501c3 status benefits that an organization can experience. It isn’t just about avoiding taxes. That’s why taking the time to structure an organization to be a nonprofit and file Form 1023 is worthwhile.