How the IRS Defines a Charitable Purpose
When someone mentions the word “nonprofit,” the first thing that most people think of is a charitable organization—considering that approximately 78 percent of all organizations exempt from paying taxes are exempt under section 501c3. The remaining 22 percent comprises social welfare nonprofits, business leagues, and social/recreational clubs. Additionally, there are about 24 other possibilities that make up this percentage.
What makes a 501c3 organization stand out from the different types of organizations out there? In a phrase: the pursuit of philanthropic goals.
A benevolent purpose or mission is the driving force behind the establishment of a charitable organization, and the operations are directed toward accomplishing that goal.
There is a requirement that any charity that registers as a 501c3 philanthropic objective. This goal is typically outlined in the governing document of the charitable organization. One or more philanthropic missions can coexist within an organization that operates under the umbrella.
One or more of a nonprofit organization’s primary goals must be advancing charitable causes to be eligible for tax-exempt status under Section 501c3. The Internal Revenue Service (IRS) lists the activities it considers charitable donations… (IRS, Publication 557 (01/2022), Tax-Exempt Status for Your Organization, 2022)
They even provide instances of different types of organizations that fall under each category. Although the information that can be found in Pub 557 is interesting, it is by no means complete. And because they present so few examples, it can often be difficult for someone thinking about starting a new nonprofit to decide precisely where their idea falls in the list of reasons. This is because the examples they give are so few. Let’s take a closer look at each of these functions, shall we?
The following are activities most likely do not meet the requirements to be considered charitable:
- Activities in leisure sports that are organized for participation by a general adult population;
- preserving and caring for a historically significant or scenic location exclusively or mainly for the benefit of the members of a private community;
- establishing a scholarship program that will be of assistance to one person;
- promoting economic growth by, for example, offering financial support to companies that have been chosen to receive it based on commercial criteria and at commercial interest rates; or
- Providing nonprofit organizations with general management advice and administrative services (that are not particularly tied to charitable activity, such as payroll or marketing consulting) in a commercial way and at commercial rates.
IRS uses the term “scientific”; however, a more accurate description of this would be “science study.” The condition that the charity version of the research must be carried out in the public interest is what differentiates philanthropic scientific research from other types of labor that are comparable. Specifically, the research findings, such as patents, copyrights, procedures, or formulas, need to be made available to the general public without favoring private interests.
Just as significant is the fact that the findings of the research cannot be exploited for the commercial or individual gain of any party involved. For illustration, if a scientific research nonprofit is investigating novel cures for leukemia, the organization’s findings must be made available to the general public. Examples of this can frequently be seen in research conducted at universities or by other nonprofit research organizations, which then publish their findings in a medical journal or another publication. This stands in stark contrast to the commercial paradigm, in which the research conducted by a pharmaceutical firm is utilized in the development of a patented drug for the sole benefit of that corporation.
Other study subjects extend far beyond the medical field. They can encompass everything from economic modeling to agricultural research to climate studies. The fact that the research findings are made available to the general audience is essential.
Education is one of the most all-encompassing 501c3 purposes, as it encompasses many potential activities. To be more specific, the Internal Revenue Service (IRS) states that to qualify as an educational charity, an organization must exist for the following:
- Education is either the process of instructing or training individuals to enhance or grow their capacities,
- Or it is the process of teaching the general public on helpful topics.
Examples are numerous and may include:
- A primary or secondary school, a college, a professional or trade school, or any other type of educational institution,
- An organization whose primary focus is on facilitating public debate through the formation of discussion groups, forums, panel discussions, lectures, and other similar events,
- An institution that delivers a curriculum to students through the mediums of television or radio, as well as through the use of written correspondence,
- A cultural institution such as a museum, zoo, planetarium, symphony orchestra, or any organization of a comparable nature.
Prevention of Cruelty
This purpose category is reserved for organizations whose primary mission is to look out for the health and well-being of animals and the protection and general well-being of children.
Fostering National or International Amateur Sports
It can be challenging to choose how to classify charitable organizations that are focused on sports, mainly since there are so many different options. Organizations that participate solely in sports for recreational purposes, such as church softball leagues, can be tax-exempt but not charitable. Additionally, youth-only sports organizations considered educational can qualify for 501(c)(3) status.
To be eligible for the objective of the amateur sport, a group must encourage genuine competition on a broader scale, at the very least on a regional level. The United States Amateur Cycling Association and the United States Amateur Volleyball Association are excellent examples of organizations qualifying as 501(c)(3) nonprofit amateur sports groups. These examples make it evident that there is a significant gap between amateur athletics and the swim club at your neighborhood YMCA. Qualifying organizations are not required to advance to this level of competition; nonetheless, they do serve to illustrate the difference.
The IRS does consider, however, that sports organizations, including little leagues where the participants are 18 and under, are considered charitable under Section 501(c)3 regardless if they foster national or international sports.
I put being charitable last since many people get confused about this one. As you are aware, the IRS classifies as charity any organizations that fall under its 501(c)(3) umbrella. Why, then, is there also a category with the same name that is dedicated to a certain purpose?
Imagine the term “Generally” placed in front of the word “Charitable” as a helpful mental exercise for thinking about this group of purposes. The following are some examples of possible missions, but the list is not exhaustive:
- Benevolent giving
- Funding organizations that make grants
- Free clinics and hospitals
- Organizations with the goal of reducing the tensions in the community
- The complete removal of all forms of prejudice and discrimination
- Protection of fundamental civil liberties