Exempt Organizations Basics

Section 501(c)(3) of the Internal Revenue Code (IRC)

• Organizational and operational tests; no private inurement.
• No political campaign activity; lobbying not substantial.
• Apply on Form 1023 (churches automatic).

Public charity vs private foundation

• Public charity: broad support; donors deduct cash up to 60% of adjusted gross income (AGI).
• Private foundation: 30% cash limit; 1.39% tax on net investment income; 5% minimum payout; no self-dealing with disqualified persons; Form 990-PF.

Unrelated business taxable income (UBTI)

• Trade or business + regularly carried on + not substantially related.
• Excluded: passive income (unless debt-financed), volunteer-run activities, donated goods, convenience of members, qualified sponsorships.
• $1,000 specific deduction; Form 990-T if gross ≥ $1,000; silo each business.
• Taxed at 21% corporate rates.

Returns

Receipts ≤ $50,000 → 990-N · < $200,000 receipts and < $500,000 assets → 990-EZ · larger → 990. Due May 15 (calendar). 3 years unfiled → exemption revoked.

Exam traps

• Any sale between a private foundation and a disqualified person is self-dealing — even at fair value, and even if it benefits the foundation.
• Gifts to foreign charities are generally not deductible for individuals.
• Donations to 501(c)(4) social welfare organizations are generally not deductible as charitable contributions.