501(c)(3) organizations enjoy tax-exempt status under the Internal Revenue Code, but with that status come strict 501c3 rules to ensure these nonprofits operate in alignment with their charitable missions. Failure to follow these rules can lead to penalties or even loss of tax-exempt status. Below are five key rules every 501(c)(3) must follow.
1. Operate Exclusively for Exempt Purposes
A 501(c)(3) must be organized and operated exclusively for one or more exempt purposes: charitable, religious, educational, scientific, literary, or similar. The organization’s mission and activities must align with these purposes, and it must avoid activities that serve private interests more than the public good.
2. No Private Inurement or Excess Benefit
A 501(c)(3) may not allow its income or assets to benefit private individuals or insiders—such as board members, officers, or major donors. This is known as the private inurement prohibition. Paying reasonable salaries is permitted, but excessive compensation or use of nonprofit resources for personal gain can result in intermediate sanctions or revocation of tax-exempt status.
3. Limit Political Activity
501(c)(3) organizations are strictly prohibited from participating in any political campaign activity, including endorsing or opposing candidates for public office. Doing so can result in immediate loss of tax-exempt status. While nonpartisan voter education and issue advocacy are allowed, these activities must be conducted carefully to avoid crossing into prohibited territory.
4. Limit Lobbying
While some lobbying is allowed, it cannot be a substantial part of a 501(c)(3)’s overall activities. Lobbying includes attempts to influence legislation at the local, state, or federal level. Organizations that plan to engage in lobbying should consider filing Form 5768 to elect the 501(h) expenditure test, which offers clearer spending limits and protections.
5. Annual Reporting Requirements
501(c)(3) organizations must file an annual return with the IRS—either Form 990, 990-EZ, or 990-N—depending on their size. Failure to file for three consecutive years results in automatic revocation of tax-exempt status. In addition, many states require annual reports or charitable registration renewals.
501c3 Rules Matter
Understanding and following these five rules is essential to maintaining compliance and public trust. Nonprofit leaders should regularly review these requirements, ensure strong governance, and seek legal or tax guidance when needed to protect their organization’s status and mission. Reach out to Dimov Tax for professional assistance.