When considering an organization’s charitable purpose and assets, there are three items to make certain the nonprofit meets. These items are outlined below as: purpose, dissolution, and income unrelated to purpose.

  • Purpose: A 501(c)(3) organization must be organized and operated exclusively for one or more charitable purposes. These purposes must meet the definition of charitable purposes under federal tax law.

Definition of “Charitable”: The term “charitable” is used in the Internal Revenue Code section 501(c)(3) in its generally accepted legal sense. That includes relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of government; promotion of social welfare.

  • Dissolution: The Articles of Incorporation must provide that, upon dissolution of the 501(c)(3) organization, all assets must go to another 501(c)(3) organization or a government entity for a public purpose.
  • Income unrelated to purpose: 501(c)(3) organizations may have a limited amount of unrelated business income (income unrelated to its charitable purpose), but the organization must report the income and pay taxes on said income. If there is too much unrelated business income, or the unrelated income is not reported, it can jeopardize the nonprofit’s tax-exempt status. There are legal tests to determine if income is unrelated business income and if there is too much unrelated business income. If unrelated income is an issue, the organization should consult an attorney.
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