CHARITY TERMS
501(c) 3 Organizations
Section 501(c)(3) is a tax law provisions granting exemption from the federal income tax to non-profit organizations. This exemption does not cover other federal taxes such as employment taxes. 501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
Another provision, 26 U.S.C. § 170, provides a deduction, for federal income tax purposes, for some donors who make charitable contributions to most types of 501(c)(3) organizations, among others. Regulations specify which such deductions must be verifiable in order to be allowed (e.g., receipts for donations over $250).
Testing for public safety is described under section 509(a)(4) of the code which makes the organization a public charity and not a private foundation, but contributions to 509(a)(4) organizations are not deductible by the donor for federal income, estate, or gift tax purposes.
The three principal classifications of 501(c)(3) organizations are as follows:
Public Charities
Identified by the Internal Revenue Service (IRS) as "not a private foundation," public charities normally receive a substantial part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections 509(a)(1) through 509(a)(4).
Private Foundations
Sometimes called a non-operating foundation, private foundations receive most of their income from investments and endowments. This income is used to make grants to other organizations, rather than being disbursed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations which do not qualify as public charities.
Private Operating Foundations
A private operating foundation is similar to a private foundation, but it devotes most of its earnings and assets directly to the conduct of its tax exempt purposes, rather than to making grants to other organizations for these purposes. Private operating foundations are defined in the Internal Revenue Code under section 4942(j)(3).
Charity Navigator
Founded in 2001, Charity Navigator has become the nation's largest and most-utilized evaluator of charities (www.charitynavigator.org). Their goal is to help people give to charity with confidence. At the same time, they aim to help charities by shining lights on truly effective organizations. In doing so, they can help to ensure that charitable giving keeps pace with the growing need for charitable programs.
In their quest to help donors, their team of professional analysts has examined tens of thousands of non-profit financial documents. As a result, they know as much about the true fiscal operations of charities as anyone. They’ve used this knowledge to develop an unbiased, objective, numbers-based rating system to assess the financial health of over 5,000 of America's best-known charities.
Specifically, Charity Navigator's rating system examines two broad areas of a charity's financial health -- how responsibly it functions day to day as well as how well positioned it is to sustain its programs over time. Each charity is then awarded an overall rating, ranging from zero to four stars. To help donors avoid becoming victims of mailing-list appeals, each charity's commitment to keeping donors' personal information confidential is assessed. The site is easily navigable by charity name, location or type of activity and also features opinion pieces by Charity Navigator experts, donation tips, and top-10 and bottom-10 lists which rank efficient and inefficient organizations in a number of categories.
American Institute of Philanthropy
The mission of the American Institute of Philanthropy (AIP), a nonprofit charity watchdog and information service, is to maximize the effectiveness of every dollar contributed to charity by providing donors with the information they need to make more informed giving decisions (www.charitywatch.org).
Their goal are to research and evaluate the efficiency, accountability and governance of nonprofit organizations; to educate the public about the importance of wise giving; to inform the public of wasteful or unethical practices of nonprofits and provide recognition to highly effective and ethical charities; to advise AIP members and conduct special investigations and evaluations of nonprofits; to expand and re-define our programs periodically to meet the continuing challenge of keeping the contributor informed.
