The term "tax-exempt organization" generally refers to an organization that is exempt from federal income taxes under the Internal Revenue Code (IRC). Although the IRC describes more than 30 types of organizations that qualify for exemption, the type that people often mean when using the term "tax-exempt organization" is found in Section 501(c)(3). That section describes entities organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.... Other types of organizations that qualify for tax-exempt status include social welfare organizations, labor unions, trade associations, social clubs, veterans' organizations, and fraternal organizations. A list of the types of tax-exempt organizations appears at the end of this report ( Table A-1 ). The term "tax-exempt organization" is often used interchangeably with the term "nonprofit organization." This can be misleading depending on the context. The term "tax-exempt organization" generally refers to an organization that meets the criteria in federal law (the IRC) to be exempt from federal income taxes. The term "nonprofit organization" can be used to mean a corporation that is not intended to be a profit-making corporation and is organized as such under state law. The status and privileges of the entity are determined under state law. The requirements vary by state but usually take into account the fact that nonprofit corporations typically do not have shareholders or the same business motives as for-profit corporations. A nonprofit corporation is not automatically a tax-exempt organization. Because the qualifications for nonprofit status vary among states, it is possible for the term "nonprofit organization" to be broader than, narrower than, or identical to the term "tax-exempt organization." For a nonprofit organization to be exempt from federal income taxes, it must meet the statutory requirements found in the IRC and, in some cases, file an application with the IRS. Section 501(c) describes many types of organizations that qualify for tax-exempt status. When an organization applies for exemption or files an annual return with the IRS, it must tell the IRS under which paragraph of Section 501(c) it qualifies. In general, this is not difficult to determine because most paragraphs describe discrete categories—for example, Section 501(c)(8) describes fraternal societies and Section 501(c)(14) describes credit unions. However, Sections 501(c)(3) and 501(c)(4) describe organizations with some overlapping characteristics in that both types can operate for charitable purposes. Despite these similarities, Section 501(c)(3) and Section 501(c)(4) organizations differ in two significant ways. First, Section 501(c)(3) organizations are eligible to receive tax-deductible charitable contributions, while Section 501(c)(4) organizations generally are not. When a contribution is deductible, the donor may subtract it from his or her income when calculating federal income tax liability, subject to restrictions found in Section 170. (See Question 6.) This is an important benefit for the organization because it may encourage donors to contribute to the organization in order to lower their taxable income and to make larger contributions since the after-tax cost of each contribution is reduced. The second difference is that Section 501(c)(3) organizations are substantially limited in their ability to lobby and are prohibited from engaging in campaign activity; Section 501(c)(4) organizations are not so limited. (See Questions 7 and 8.) These two differences are important when an organization is choosing whether to be a Section 501(c)(3) or Section 501(c)(4) organization. If the group's agenda depends on influencing public opinion or the legislative process, it may be appropriate to form as a Section 501(c)(4) organization. Otherwise, it will usually make more sense to be a Section 501(c)(3) organization in order to have the advantage of tax-deductible contributions. While an organization must identify itself as one type of Section 501(c) organization, it may be linked with another Section 501(c) organization under certain circumstances. For example, it is common to see a group that wants to lobby as well as conduct charitable activities set up both a Section 501(c)(4) organization and a Section 501(c)(3) organization. Another common example is for a Section 501(c)(6) trade association, such as the American Bar Association or American Medical Association, to have a similarly named foundation that conducts charitable activities. In addition, a Section 501(c) organization may be linked with another type of tax-exempt organization, such as a Section 527 political organization. (See Question 8.) In all of these situations, the organizations must be legally separate entities, and their activities and funds must be kept separate. A Section 501(c)(3) organization is either a public charity or private foundation. Public charities have broad public support and tend to provide charitable services directly to the intended beneficiaries. Private foundations often are tightly controlled, receive significant portions of their funds from a small number of donors or a single source, and make grants to other organizations rather than directly carry out charitable activities. Because these factors create the potential for self-dealing or abuse of position by the small group controlling the entity, private foundations are more closely regulated than public charities. As such, private foundations are subject to penalty taxes for doing things such as failing to distribute a certain amount of their income each year; making investments that jeopardize their charitable purpose; having excess business holdings; and failing to maintain expenditure responsibility over certain grants. Section 501(c)(3) organizations are presumed to be private foundations and, if they want to be treated as a public charity, must tell the IRS how they qualify for public charity status based on the support and control tests found in IRC Section 509. Under Section 170, contributions made for charitable purposes are tax deductible when made to qualifying Section 501(c)(3) organizations, governmental units, veterans' organizations, fraternal organizations, and cemetery companies. The IRS determines whether a Section 501(c)(3) organization is eligible to receive tax-deductible contributions at the time it considers the organization's application for exempt status. A donor can check to see whether an organization is eligible to receive tax-deductible charitable contributions using the "Exempt Organizations Select Check" search engine on the IRS website. Charitable contributions that otherwise meet the requirements of Section 170 are not deductible if the organization provides goods or services in exchange for the contribution. However, if the contribution exceeds the fair market value of the goods or services provided, then the excess may be deductible. When an organization receives more than $75 in exchange for goods or services, it must inform the donor of the amount of the contribution, if any, that is tax-deductible. Even if a contribution is deductible, individual taxpayers may not be able to deduct the entire contribution. For example, only individuals who itemize deductions may deduct their charitable contributions, and Section 170 may restrict the amount of the deduction depending on the size and nature of the contribution. In addition, taxpayers must comply with certain substantiation requirements, including that (1) a written acknowledgment be obtained from the organization for any contribution that exceeds $250 in value and (2) any cash donation be substantiated by a bank record or written communication from the organization showing its name and the date and amount of the contribution. When a contribution to a tax-exempt organization is not deductible, the organization must generally notify the potential contributor of that fact at the time of solicitation. An organization that fails to provide the notification faces a fine of $1,000 for each day the failure occurs, with an annual cap of $10,000. The fines are higher and the cap is eliminated for organizations that intentionally disregard the notification requirement. Dues to some tax-exempt organizations, such as Section 501(c)(5) labor unions and Section 501(c)(6) trade associations, may be deductible as business expenses under IRC Section 162. If an organization conducts lobbying or political activities, Section 162(e) disallows a deduction for the portion of dues that represents lobbying or political expenditures. In general, an organization must notify its members of the amount that is nondeductible or be subject to a proxy tax on its lobbying or political expenditures. Furthermore, individuals face additional restrictions in being able to deduct their dues. For example, only individuals who itemize deductions and have significant business expenses (i.e., exceeding 2% of adjusted gross income) may deduct the dues. Under the IRC, some types of tax-exempt organizations are restricted in the amount of lobbying they may do and the rest may conduct unlimited lobbying. Section 501(c)(3) organizations are the primary example of entities that are limited in the amount of lobbying they may do: "no substantial part" of their activities can be lobbying. The IRC does not define "no substantial part." In interpreting the term, courts have looked at the amount of expenditures or time spent on lobbying, or examined the lobbying in the broad context of the organization's purpose and activities. Because the "no substantial part" standard is indefinite, Section 501(c)(3) organizations, with the exception of churches and related organizations, may elect to have their lobbying activities measured by a numerical limit found in IRC Section 4911. Most organizations do not make this election. A Section 501(c)(3) organization that conducts substantial lobbying may lose its exempt status and face possible excise taxes under Sections 4911 and 4912. Notably, private foundations (discussed in Question 5) are taxed under IRC Section 4945 on any lobbying expenditures made during the year, regardless of whether such activities are substantial.