Internal Revenue CodeWith the current state of the world, charities are needed now more than ever.  If you are contemplating creating a charity you should consult with a qualified tax attorney or advisor as the world of charities is more complicated than you would think.

In general, organizations described in IRC 501(c)(3) fall into two categories: private foundations and public charities. IRC 509 makes the statutory distinction between private foundations and public charities which are if you do not qualify as a public charity you are a private foundation. This difference is important because private foundation have much stronger rules against self dealing and mandatory distributions.

There are basically two kinds of public charities: 1) organizations that engage in inherently public activities; and, 2) publicly supported organizations.

Organizations that engage in inherently public activities are typically what one thinks of as charities and include:

  • Churches;
  • Educational organizations;
  • Hospitals; and,
  • Governmental units of the United States

Publicly supported organizations are charities that normally receive a substantial part of their support from governmental units and/or from direct or indirect contributions from the general public. The “substantial part of support” requirement is met by satisfying a thirty-three and one third percent support test or, alternatively, a “facts and circumstances” ten percent test.

To apply for recognition by the IRS of exempt status under IRC 501(c)(3) an organization must prepare and submit a Form 1023, Application for Recognition of Exemption.  The IRS charges a user fee of: 1) $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period; and, 2) $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period.  This does not include the professional service fees paid to prepare and submit the Form 1023.

Under California State law, a nonprofit public benefit corporation must be  organized primarily or exclusively for charitable purposes. In addition, it must either 1) plan to obtain state tax exempt status under IRC 501(c)(3), or 2) is organized to act as a civic league or a social welfare organization and which plans to obtain state tax exempt status under CR&TC 23701(f) and/or federal tax exempt status under IRC 501(c)(4)..  In contrast a corporation organized for other than religious, charitable, civic league or social welfare purposes will be a nonprofit mutual benefit corporation.

As you can see above, if you are thinking about forming a tax exempt organization for charitable purpose it is important that you consult a qualified tax attorney or other professional before taking on this needed and fulfilling mission.