Knowing the different types of nonprofit charitable organizations will help you determine how to raise funds for them without violating IRS rules. Section 501(c) of the Internal Revenue Code lists 29 types of nonprofits that are exempt from certain federal taxes. Charitable organizations are covered by 501(c) (3) of the Code, which allows donors to claim a deduction on their federal income taxes. Most states also allow non-profit organizations to claim deductions on state income taxes.
There are two general categories of 501(c) (3) nonprofits:
Public charities: These are organizations that receive the bulk of their funding through donations from the general public, private foundations or government sources. They may promote charitable, religious, literary, educational and scientific causes. They may also be engaged in qualified medical research in affiliation with a hospital or educational institution. Examples of public charities include animal welfare societies, museums, public collages, food banks, and local arts groups.
To retain their status under the Code, the public charity must get at least one-third of its funding from a broad base of donors rather than from just a handful of groups or individuals, and must maintain a program of active fundraising. They are entitled to apply to have all income related to their mission or business be given tax-exempt status. Individual donors may claim tax deductions of up to 50% of their income, while corporate donors are limited to ten percent. In addition, public charities must maintain a governing board that should consist of persons who are unrelated to the Organization.
Private foundations: These are not directly engaged in charitable activities, but fund organizations that perform this mission through grants. They are established using endowments from specific sectors, such as a family or an organization.
Although individual donors can claim up to 30% of their income as a tax deduction, many foundations do not accept donations. Instead, they invest their funds and then use the income from them to make endowments to their chosen organizations. However, the governing board can be more closely held than that of a public charity; for instance, a family foundation can have a board that consists of members of the family that set it up.
There are two types of private foundations:
* Non-operating foundations are those that give money to other charitable groups.
* Operating foundations are those that run their own charitable programs.
To retain its tax status as a foundation, it must donate a certain percentage of its income annually. Foundations are also prohibited from engaging in political activity, although they can donate to groups that are involved in lobbying. Examples of foundations include the Ford Foundation and the Bill and Melinda Gates Foundation.