We shall begin with a logic exercise:
All 501(c)(3) organizations are nonprofit organizations. All 501(c)(3) organizations are tax-exempt. Not all nonprofit organizations are 501(c)(3) organizations OR tax-exempt. And not all tax-exempt organizations are 501(c)(3) organizations. Many people use these terms or phrases interchangeably but they actually are NOT synonymous.
A nonprofit organization is any entity (corporation, limited liability company, etc.) that essentially does not operate to earn a profit. Oftentimes, these organizations fund their activities and operations and use remaining revenue to benefit some public interest in line with their missions. Nonprofit organizations, as is the case with all organizations and businesses, are organized at the state level and do not necessarily have a federal income tax exemption (under section 501(c) of the Internal Revenue Code (IRC)). Some have state tax exemptions and there are some that do not have any federal or state tax-exempt status at all. The most well-known and popular exempt status is the 501(c)(3) however there are others. These exemptions allow organizations to not pay taxes on their income.
As previously mentioned, there are other popular federal tax-exempt statuses for nonprofit organizations whose missions do not fit into the 501(c)(3) categories. While they do not offer the benefit of tax-deductible donations, they do grant these organizations a tax exemption for income related to the organization’s mission.
501(c)(4) organizations are probably the second most popular federal tax-exempt status enjoyed by nonprofit organizations. Most 501(c)(4) organizations are classified as social welfare organizations whose primary missions promote the common good and general welfare of the public. 501(c)(4) organizations have much more latitude when it comes to political activities but must ensure that their primary activities are in line with their mission which must promote the common good. For 501(c)(4) organizations, income spent on certain political activities (campaigns) is not tax-exempt and contributions to 501(c)(4) organizations are generally not deductible (membership dues can be deducted as a business expense).
Business organizations such as real estate boards, chambers of commerce and trade organizations typically fall under IRC 501(c)(6). These organizations are also able to engage in political activities however contributions to them are not tax-deductible to donors. 501(c)(6) organizations must be careful not to operate for the benefit of any one individual as this has the potential to jeopardize their income tax exemption.
When contemplating which tax-exempt status to apply for, it is important to think about your organization’s past and current activities as well as your organization’s aspirations. Make sure that you apply for a tax-exempt status that fits both your current needs but leaves room for your organization’s activities to grow.