What’s in a Number?

You’ve probably run across this code somewhere before: 501(c)(3). You’ve probably even seen it enough to know, at least, that it has some kind of connection to charities.

You’re right about that. But it’s important to have more than a passing knowledge about it. Here’s why: 501(c)(3) is an IRS tax classification that denotes a tax-exempt organization. Only organizations that are dedicated to the public good, and which meet the IRS’s guidelines can qualify for this tax-exempt status. Donations to such an organization can be taken as a deduction when it comes time to prepare your annual tax return. In fact, the only way your donation is fully tax-deductible is if the recipient holds the 501(c)(3) status.

There are actually 25 different IRS classifications that start with “501.” And each one means something a little different both for the organization that holds the designation and the person supporting it. In other words, don’t stop reading at “501.”

Perhaps the most critical difference between a 501(c)(3) and the other 501 designations is the public nature of the (c)(3). Many of the other 501 classifications range from private-membership societies to social and recreational clubs. The (c)(3) organizations are the only ones under the 501 umbrella that serve the common good and receive its support from the public.

This being a tax code, there are a slew of other minor differences to make this as complicated as possible. But the one in the above paragraph’s the only one that really matters to you, as a potential supporter.

A public charity, as defined by the IRS, receives most of revenue from the either the public or from government. And a third of its donated revenue needs to come from a fairly broad base. It also has to maintain a governing body that’s mostly made up of otherwise-unrelated people.

By contrast, a private foundation can receive its donated revenue from a handful of donors, or even just a single donor. They typically don’t operate their own programs. Instead, they usually support charities through grants.

Donations to either entity are tax-deductible—up to 50% of the donor’s income in the case of a charity and 30% for a foundation.

So, look for the 501(c)(3) before you make your donation. With that, you’ll find peace of mind.