Nonprofits’ 501(c)(3) status offers tax exemption at a cost

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Before applying for a 501(c)(3), service organizations might want to consider the limitations set on how registered nonprofits can do business.Officials at remind entrepreneurs who are considering starting 501(c)(3) business types that there are regulations on these tax-exempt organizations.

To start, a 501(c)(3) cannot use more than 15 to 20 percent of its resources for lobbying. The IRS has the right to assess lobbying activity and take away tax exemption if it determines the activity “excessive.”

Additionally, a tax-exempt nonprofit cannot be operated for the benefit of private interests. The organization’s creator, family, and shareholders must be able to prove that the nonprofit activity benefits the community more than them as individuals. Moreover, owners and shareholders cannot use any of the organization’s earnings for their personal benefits.

A 501(c)(3) organization is also prohibited from getting involved in political campaigns. They are currently not allowed to advocate for or against any public office candidates in printed or oral statements.

This last point might soon change. According to Crain’s Detroit Business, a new Supreme Court ruling might help nonprofits be able to direct their funds toward supporting political candidates who could benefit their organization’s mission.

Entrepreneurs might want to follow the development of this ruling at the state level before incorporating their business as a 501(c)(3).