The Difference Between Tax Exempt Organizations – An Introduction

This post is meant to be a brief introduction to the difference between basic tax exempt and nonprofit entities. I’d like to focus on the fact that there are tax exempt entities that receive deductible contributions and those that do not receive deductible contributions.

The most basic of examples I can use is Rotary International. I’m a Rotarian and I think more people should get involved in public service in their communities. Rotary clubs are tax exempt under Internal Revenue Code (IRC) 501(c)(4). This does not mean that donations to Rotary clubs are tax deductible.

Tax deductibility is determined by IRC 170(c). IRC 170(c) does not say that civic leagues can receive tax deductible donations. IRC 170(c) does say that entities “organized and operated exclusively for religious, charitable, scientific, 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,” can receive tax deductible donations. This is the standard definition of an entity organized under IRC 501(c)(3).

So what does Rotary International and Rotary clubs do since they cannot receive tax deductible donations? They form 501(c)(3)s of their own in order to fund their many charitable activities. Rotary Foundation is Rotary International’s charitable organization.

There is little incentive to donate to 501(c)(4)s except for pure altruism and belief in the organization. In order to entice Americans to give to charitable organizations, the United States government allows individuals who file Schedule A with their Form 1040 to deduct certain donations. So what you get is incentive to give by lowering your income tax bill at the end of the year.

There are other organizations that can receive tax deductible donations other than 501(c)(3)s so verify with the organization whether donations are deductible.