A nonprofit organization is an organization that does operate to generate profit nor does it distribute its income to its members, directors or other officers. Nonprofits can be formed like corporations, foundations, partnerships, etc. but must be designated ‘nonprofit’ when created and organized.
The most common type of nonprofit organization is a 501(c)3. These nonprofits are tax deductible and can either be private or public organizations. They usually fall under one of the following categories: religious, educational, charitable, scientific, literary, groups that test for public safety, those that foster national or international amateur sports competitions, or groups that prevent cruelty to children or animals.
There are 5 types of 501(c)3 nonprofits:
- 509(a)(1) – Public Supported Charities – Publically supported charities are organizations that the public typically associates as nonprofits. These include schools, hospitals, religious organizations and other groups who receive their funds through gifts, grants and other public contributions.
- 509(a)(2) – Exempt Purpose Activity Supported Charities – These charities are similar to the publically supported charities, however they receive support through a combination of gifts, grants, and fees for their services.
- 509(c)(3) – Supporting Charities For 509(a) or 509(a)(2) Charities – These organizations are not exactly charities themselves, but work with publically supported charities. Examples are foundations created to support schools, fire departments or police stations.
- 509(a)(4) – Public Safety Charities – These groups are dedicated to public safety. Not many organizations fit this category, and those that did have to submit annual paperwork to maintain their public safety status.
- Private Foundation – A private foundation is one that doesn’t fit the above categories. They are typically funded by one source (rather than by the public), generate revenue from endowments or funds, and make grants to other charitable nonprofit organizations.
It’s important to know the classification of your nonprofit, not only for tax purposes, but for marketing to your donors and supporters. Donors donate in the hopes of getting a tax write-off, so understanding the different types of nonprofit organizations and whether they qualify is necessary.
It’s important to use nonprofit accounting software that understands the different tax codes to ensure your organization follows the rules set by the IRS. For more information about nonprofit accounting software, visit https://www.capitalbusiness.net/products.
Capital Business Solutions provides accounting solutions for nonprofit organizations throughout the midwest and southeastern United States. To learn more about our software solutions or training and consulting services, contact 877-889-0629 or contact us online!