501(c)(3) versus 509(a)(1). What is the difference between these two statuses?
Section 501(c)(3) is the section of the Tax Code that describes religious, scientific, literary, educational and other charitable organizations exempt from federal income tax. All charities are further subdivided, however, between public charities, which receive broad public support from gifts or fees, and private foundations, which receive almost all of their income (other than investment income) from a very narrow group of persons, such as a single individual, family or corporation. The Code provides more restrictions on the activities of private foundations than on public charities. (See Ready Reference Page: What Do We Mean When We Say Nonprofit?)
Every charity is deemed to be a private foundation unless it satisfies the IRS that it meets one of the definitions of a public charity under Section 509(a). Section 509(a)(1) primarily includes churches, schools, hospitals, and other organizations that receive their public support primarily from gifts, grants and contributions from a broad group of people. Section 509(a)(2) covers organizations that receive their support from a combination of gifts, grants and contributions and fees for their exempt services. The methods of calculating these public support levels can be tricky. (See Ready Reference Page: “Calculating Public Support.”)
Section 509(a)(3) covers “supporting organizations” that support other public charities, governmental units and certain other exempt organizations. They receive public charity status because of the relationship, without regard to the source of their income. Congress has recently enacted some significant limitations on supporting organizations. (See Ready Reference Page: Congress Passes Charitable Reforms, Approves Limited Giving Incentives.”)
Therefore, it is not 501(c)(3) versus 509(a)(1), but 501(c)(3) and 509(a)(1).
Comments
If my organization is a 501(c)(3) would it then be ok to answer yes to this question: "I certify that this organization is a public charity described in Internal Revenue Code section 509(a)(1), (2) or (3) (other than an organization described in Internal Revenue Code section 4942(g)(4)(A)(i) or (ii)). I further certify that all funds received by this organization from the American Water Charitable Foundation will be used for one or more of the purposes specified in section 170(c)(2)(B) of the Internal Revenue Code of 1986 or corresponding provisions of any subsequent federal tax law."?
This question is asking whether you are a private foundation or a public charity. Section 501(c)(3) includes both public charities and private foundation. You recognition of exemption letter will tell you whether you are classified as a public charity under Section 501(a)(1), 509(a)(2), or 509(a)(3). Your tax return will also tell you how you are filing, although it is not primary evidence of your status.
Is there a typo in this last line?
Therefore, it is not 501(c)(3) versus 509(a)(1), but 501(c)(3) and 509(a)(1)
The last sentence is correct. 501(c)(3) includes organizations described in 509(a)(1).
Thanks for the information I will need a lot more.
How can we change our filing from a 501(c)(3) to a 509(a)(2)?
These are not inconsistent classifications. You have to be classified as a 501(c)(3) charity to be classified as a public charity under Section 509(a)(1),(2), or (3).
Very helpful, thank you!
So in order to be a 509(a)(3) supporting organization, do you have first obtain a 501(c)(3) classification? If that is the case, can you submit requests simultaneously, or do you have wait until you receive your 501(c)3 letter of determination before you can submit Form 8940 for 509(a)(3) determination?
If you are applying for 501(c)(3) exemption of a new organization, you can — and should — apply for the 509(a)(3) supporting organization at the same time. If you already have the (c)(3) status and want to change from another public charity classification, you should submit Form 8940 and the accompanying information to change your non-private foundation status. —Don Kramer
My organization should have been classified as a 501 (c) (3), 509 (a) (1) as most funds are derived from diverse general public donations. Unfortunately, I must have marked something incorrectly and have been classified as a Private Foundation. What recourse do we have to correct this now before we move into our second year. We have not actually started operations yet and are still organizing logistics, partnerships, and processes. Thank you.
Don Kramer: Thanks for your question - here's some guidance - https://www.nonprofitissues.com/to-the-point/how-do-i-change-private-fou...
We were classified as a 509(a) under the 501(c)(3) classification. Some giving organizations have now stated they cannot support us because we are not a charity. How can we appeal the decision, and gain certification as a charity and not a foundation? We do receive support from a wide variety of companies. and individuals
Thanks for your question. It's worth a closer look. Here's our response - https://www.nonprofitissues.com/to-the-point/how-can-we-correct-our-charity-classification
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