INSIGHT: Decoding your exemption letter: 501(c)(3) exemption and public charity status

I frequently get questions about decoding a non-profit’s tax-exempt status because the determination letter they’ve received from the IRS has a section at the top that lists “Public Charity Status” as 509(a)…, 170(b)…, or similar, and not the anticipated 501(c)3.

A closer look at the first line of the exemption letter received by the majority of non-profits reads clearly enough: “We’re please to tell you we determined you’re exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c)(3).”  or something very similar.  So why the apparent discrepancy in “Public Charity Status”?

In fact, there is no discrepancy at all. The 501(c)(3), 509(a)… and 170(b) indicators are not mutually exclusive.  Many different types of organization can qualify for tax exempt status under section 501(c)(3).  The basis of that qualification is defined in other parts of the IRC.  In the case of hospitals and schools that receive the majority of their revenue from gifts, donations and grants, it is section 509(a)(1) that defines them as public charities eligible for 501(c)(3) tax exempt status.  When it comes to non-profit organizations that receive the majority of their income from program revenue, it is section 509(a)(2) that defines them as public charities eligible for 501(c)(3) tax exempt status. If your organizations receives support from a diverse range of sources, you may find 170(b) listed as your public charity status.

Regardless of the basis, the first line of the determination letter confirms that your organization is tax exempt under 501(c)(3) and that should be sufficient for your donors and funders.   Should the question persist at their end, there is one other option. The IRS provides an online tool to confirm the tax exempt status of any organization in its system.  The system is called the Exempt Organizations Select Check Tool. With this tool, you are able to confirm whether an organization’s tax exempt status is current, has ever had its exempt status automatically revoked for failure to file annually, or is required to file an abbreviated form 990-N annually due to its smaller size.

Between this understanding of your determination letter and the option of the online confirmation, you  should be able to address any potential funder’s questions.  However, if these or other questions leave your organization unclear, feel free to contact Zak Shusterman directly.

 

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