Can I Claim a Tax Deduction for that Donation?

Here’s some information to wow your friends with at your next party (especially if you don’t want to be invited to parties anymore). The United States Code is the official written collection of (most of) the general and permanent federal statutes of the United States. It contains 53 titles, broad subject areas under which federal laws are grouped. For example, Title 26 is the Internal Revenue Code (IRC).

Titles are subdivided into subtitles, which are in turn, broken down into chapters, broken into subchapters, broken into parts, broken into sections. Sections, designated by numbers, are subdivided into subsections indicated by letters in parentheses and into paragraphs indicated by numbers in parentheses. The part of the law that defines tax-exempt charitable organizations is found in US Code, Title 26, Subtitle A, Chapter 1, Subchapter F, Part I, Section 501, subsection c, paragraph 3.

We shorten the reference by citing IRC section 501(c)(3) or just 501(c)(3). And you wondered why R&A CPAs employs people who specialize in non-profit taxation! 

Here’s another thing you should know: IRS and federal law will always refer to charitable organizations as tax-exempt entities or exempt organizations–never as nonprofits. “Nonprofit” is a term states use to define an organization’s legal structure under state law where the organization isn’t formed to make a profit. Most people use “tax-exempt” and “nonprofit” interchangeably, but now you know better. Don’t even get us started on the differences between “nonprofit,” “not-for-profit,” and “non-profit.” Nevertheless, whatever term you choose to use, we won’t judge.

IRC section 501(c) has 29 paragraphs that define different types of organizations that can be exempt from taxation. This matters to you because as someone who values charitable giving, you need to know which organizations you can give to that will permit you to claim a tax deduction on your tax return. (Yes, we recognize that some people give to charities for purely altruistic reasons.)  Just because an organization is recognized as a charity by IRS does not mean that you can deduct your donations to it. Here’s a rule of thumb (meaning it doesn’t always apply): only donations to 501(c)(3) organizations qualify for the charitable tax deduction.

Let’s talk about the types of exempt organizations you are most likely to encounter and whether these organizations are qualified to accept tax-deductible donations.

501(c)(3) Organizations

Charitable organizations as defined by 501(c)(3) are those organized and operated for exclusively religious, charitable, scientific, educational, or other similar purposes. These organizations focus on providing assistance and relief to those in need, addressing issues like poverty, healthcare, education, or social welfare. 501(c)(3) organizations can be public charities, supported by the general public, or private foundations, supported by a few individuals. Donations to both public charities and private foundations are tax deductible, although the limits on the amount of allowable deductions are different. Both public charities and private foundations are required to file information returns with IRS (informally called tax returns).

Churches

Churches that meet the requirements of 501(c)(3) are automatically considered tax-exempt and are not required to apply for tax-exempt status. Donors can claim charitable deductions for donations to a church the same way they would any other 501(c)(3) donation. Churches that use the automatic exemption option are not required to file annual tax returns, so information you can gather on the finances and operations of a church can be more limited than it is for organizations that file returns.

Educational institutions

Like churches, public schools and public universities that meet the requirements of 501(c)(3) can be automatically considered tax-exempt so are not required to apply for tax-exempt status. Charitable donations to public schools are generally tax deductible. Many states, including Arizona, offer tax credits for donations to public schools.

Donations to private schools may or may not be deductible. If the school is organized under 501(c)(3), you can deduct your donations. Donations to private for-profit schools are not tax deductible.

One caution about donations to public schools: if the donation is designated to be used for a particular student, the donation is not tax deductible.

Most schools are not required to file tax returns but do have many other federal and state disclosure requirements. You can usually find a great deal of information about a school’s operations and finances in the public record.

501(c)(4) Organizations

Organizations exempt from taxation under section 501(c)(4) are those operated for the promotion of social welfare and can include civic leagues or local associations of employees. Donations to these organizations are generally not tax deductible. Some examples of 501(c)(4) include the National Rifle Association, Sierra Club, ACLU, and AARP. 

Be aware that although donations to these organizations are not tax deductible, many large national 501(c)(4) organizations are affiliated with related 501(c)(3) organizations that can accept deductible donations. For example, AARP Foundation is a 501(c)(3) charitable organization affiliated with AARP, and donations to AARP Foundation are tax deductible.

501(c)(7) Organizations

Organizations exempt from taxation under section 501(c)(7) include clubs organized for their members’ pleasure, recreation, or other similar activities. These organizations include amateur hunting clubs, hobby clubs, sports clubs, and college fraternities and sororities. The income for 501(c)(7) organizations must be generated mainly from membership dues and fees. Generally, donations to these organizations are not tax deductible. 

There are many other types of charitable organizations not discussed here. If you have questions about any of them or want to know if your charitable donation qualifies for a tax deduction, call one of our non-profit tax professionals at R&A CPAs. We love non-profits and are always happy to answer questions about them. (We would be even happier if you invited us to a party.)