501(c)(3) exemption : eligibility

There are 3 eligibility criteria fixed by IRS for granting of 501(c)(3) exemption.

I) Organized – The organization must either be a corporation, trust, or unincorporated association which must be evidenced by its organizing document which could be its articles of incorporation, trust documents or articles of association.

II) Exempt Purpose – For tax exemption, the NPO must be formed for some  exempt purposes as mentioned in its organizing document.  Exempt purpose as per IRS include the following : charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety. The organization must dedicate permanently its assets to exempt purposes.

III) Prohibitions & Restrictions – A substantial portion of the activities of the 501(c)(3) organization’s must be  directed to further its exempt purpose(s), The organization:

  • Must not engage in activities unrelated to its exempt purpose.
  • Must not participate in political campaigning.
  • Must restrict its lobbying activities to an insubstantial part of its total activities.
  • Must ensure that its earnings do not inure to the some private benefit.
  • Must not operate to benefit private interest say, of its founder, their family, its shareholders or persons controlled by such interests.
  • Must not engage in illegal activities or those that violate public policies.

An organization that meets or agrees to meet these criteria can apply and receive 501(c)(3) tax exemption recognition. There is again an annual reporting requirement (FORM 990 or equivalent reports) binding on all 501(c)(3) exempt organization.