Which Type of Nonprofit Are You? Follow the Code!

If you are looking to start a nonprofit organization, you may assume that all nonprofits are created equally when it comes to taxes. However, the IRS identifies twenty-seven different types of nonprofits. Each one has different requirements for eligibility and follows different rules on what can be taxed, but what are these different categories?

First off, what is a nonprofit? There is no one, absolute definition, but Cornell Law School defines a nonprofit as “a group organized for purposes other than generating profit and in which no part of the organization's income is distributed to its members, directors, or officers,” (Legal Information Institute). The real regulations on what makes a nonprofit come from tax exemptions and what part of tax law might exempt an organization.

The Internal Revenue Code (IRC) contains a wide spectrum of tax exemptions. Some are broad and contain many familiar nonprofits such as 501(c)(3), which covers charitable organizations. “Public charities are the largest type of 501(c)(3) with nearly 1 million registered in the United States,” (UpCounsel.com). These charities include churches, museums, animal shelters, libraries, and low-income housing. Most sections of the IRC require organizations to apply for tax exempt status (apply here), but 501(c)(3) are sometimes automatically considered tax-exempt. On the other end of the spectrum, there are also more specific categories such as 501(c)(21), the Black Lung Benefits Trust. This covers trusts created to pay out claims resulting from the Federal Black Lung Benefit Act of 1969, which benefits coal miners who develop black lung disease. Let’s dive into the rest, shall we?

501(c)(1): exempts nonprofit organizations created by an Act of Congress (example: federal credit unions).  They are not required to apply for tax exemption, nor are they required to file a tax return.

501(c)(2): exempts nonprofit organizations created to hold property titles for other exempt organizations.

501(c)(3): exempts charitable organizations, the most common exemption for nonprofits.

501(c)(4): exempts civic leagues, social welfare organizations, or local employee associations. This includes Home Owner’s Associations and other organizations for community welfare.

501(c)(5): exempts labor, agricultural, and horticultural organizations that have the goal of educating, improving work conditions, and increasing efficiency.

501(c)(6): exempts trade or professional associations, which are nonprofit organizations such as business leagues, chambers of commerce, and real estate boards.

501(c)(7): exempts social or recreational clubs such as sports leagues or country clubs.

501(c)(8): exempts fraternal societies such as Shriners, Knights of Columbus, or other secret societies and lineage groups. They provide life and accident benefits to members of the lodge.

 501(c)(9): exempts employee beneficiary associations covering life, accident, and other benefits for employees of the same company or unions. Employees join on a voluntary basis.

501(c)(10): exempts domestic fraternal societies and associations, which is different than 501(c)(8) in that these nonprofit organizations are fraternal societies that give no benefits to the members, but instead, use member dues to support outside causes.

501(c)(11): exempts teacher’s retirement fund associations, which are local nonprofits that manage teachers’ retirement funds and the payment of their benefits.

501(c)(13): exempts cemetery companies, which are nonprofits created to provide burial services for its members.

501(c)(14): exempts state-chartered credit unions and mutual reserve funds, which are nonprofits that offer loans to their members.

501(c)(15): exempts mutual insurance companies and associations, which provide insurance to members.

501(c)(16): exempts cooperative organizations to finance crop operations, which are nonprofits created by farmers who bring their resources together to finance agricultural projects.

501(c)(17): exempts supplemental unemployment benefits trusts, which are nonprofits funded by employers that support unemployed individuals.

501(c)(18): exempts employee-funded pension trusts, which benefit trusts funded by employees before June 25, 1959.

501(c)(19): exempts nonprofit veterans’ organizations that provide benefits to United States Armed Forces members.

501(c)(21): exempts the Black Lung Benefits Trusts, which are trusts created to pay claims that arise from the Federal Black Lung Benefit Act of 1969.

501(c)(22): exempts withdrawal liability payment funds, which are nonprofit organizations created to provide pension funds to employers withdrawing from multi-employer pension funds.

501(c)(23): exempts veterans’ organizations that were established before 1880. They provide insurance and benefits to members.

501(c)(26): exempts state-sponsored organizations providing health coverage for high-risk individuals who may not be able to receive coverage elsewhere.

501(c)(27): exempts state-sponsored workers’ compensation reinsurance organizations, which are nonprofit organizations created to provide insurance for workers’ compensation programs.

There is your basic overview of the different exemptions for nonprofits in the IRC. Some numbers have been omitted as those exemptions are no longer in use. For an exhaustive list, please see IRS Publication 557, last revised in January 2022. While it is always wise to consult tax professionals for your business, understanding the basics can help you feel more prepared and informed as your nonprofit takes shape. “Charitable nonprofits embody the best of America…They give shape to our boldest dreams, highest ideals, and noblest causes,” (National Council of Nonprofits).

Works Cited

“Non-Profit Organizations.” Legal Information Institute, Legal Information Institute, https://www.law.cornell.edu/wex/non-profit_organizations#:~:text=A%20non%2Dprofit%20organization%20is,members%2C%20directors%2C%20or%20officers.

“Types of Nonprofits: Everything You Need to Know.” UpCounsel.com https://www.upcounsel.com/types-of-nonprofits.

“What Is a ‘Nonprofit’?” National Council of Nonprofits, 1 Oct. 2020, https://www.councilofnonprofits.org/what-is-a-nonprofit.