Qualifying under 501(c)(3)
The organization must be organized and operated exclusively for exempt purposes — charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports, or preventing cruelty to children or animals.
- No private inurement — net earnings may not benefit any private shareholder or individual
- Limited lobbying — no substantial part of activities may attempt to influence legislation
- No political campaign activity — an absolute prohibition; violation can cost the exemption entirely
Public charity vs. private foundation
| Public charity | Private foundation |
|---|---|
| Broad public support or specific type (church, school, hospital) | Typically funded by a single family or corporation |
| More favorable donor deduction limits | Lower donor deduction limits |
| Files Form 990 | Files Form 990-PF; subject to excise taxes and minimum distribution requirements |
All 501(c)(3) organizations are presumed to be private foundations unless they demonstrate public charity status.
Unrelated business income tax (UBIT)
Even an exempt organization pays regular corporate tax on income from a business that is:
- A trade or business,
- Regularly carried on, and
- Not substantially related to the exempt purpose
All three must be present. A specific deduction (commonly $1,000) applies, and Form 990-T is filed.
IMPORTANT — common UBIT exclusions: dividends, interest, royalties, and most rents from real property; income from a business where substantially all work is performed by volunteers; sale of donated merchandise (thrift shops); and activities carried on primarily for the convenience of members, students, or patients.
EXAM TIP: A museum gift shop selling art books related to its exhibits is substantially related (no UBIT). The same shop selling unrelated consumer electronics generates unrelated business income.