The Internal Revenue Service (IRS) permits a variety of non-profit organizations to receive tax-exempt status under sections 501(c)(3) and 501(c)(6) of the 1986 Internal Revenue Code. So, What is the Difference Between 501c6 and 501c3? Though similar in their non-profit status, these classifications differ based on their purposes, benefits, limitations, and activities. This paper will expound on the distinctions between the two.
Overview of 501(c)(3) Organizations
Non-profit organizations under section 501(c)(3) are typically established for charitable, religious, educational, scientific, literary, or public safety purposes. They are also prevalent in amateur sporting circles and the prevention of cruelty to children and animals. This wide range of areas typifies the broad contribution that 501(c)(3) entities provide toward public welfare.
These organizations enjoy two primary benefits – exemption from federal corporate taxes and the ability for donors to claim tax deductions for their contributions. As a rider to these benefits, these organizations face the limitation of being restricted in their capacity to participate in political campaigns or lobbying activities.
Overview of 501(c)(6) Organizations
Business leagues, chambers of commerce, real estate boards, boards of trade, or professional football leagues, amongst others, fall under the 501(c)(6) category. These organizations primarily operate to promote a common business interest and do not direct their efforts toward individual profits.
Like 501(c)(3) organizations, entities under 501(c)(6) also enjoy exemption from federal corporate taxes, however, donations made to these organizations are typically not tax-deductible. Furthermore, unlike 501(c)(3) organizations, section 501(c)(6) enables substantial lobbying activities, provided that it aligns with the organization’s purpose.
Comparison: 501c3 versus 501c6
Now that we have an understanding of the concepts behind each classification, let’s delve into the main factors differentiating the two: purpose, fundraising and donations, and political lobbying.
When it comes to purpose, 501(c)(3) organizations are designed to serve the public good in a charitable manner, while 501(c)(6) organizations are designed to promote common business interests.
Regarding fundraising and donations, both types of organizations have different rules. While donations are tax-deductible for donors to 501(c)(3) organizations, donors to 501(c)(6) organizations generally cannot deduct their contributions. This can impact the number and size of donations each type of organization receives, with potential donors being incentivized to contribute more to 501(c)(3) entities given the financial advantages.
The final comparison, political lobbying, is another area with marked differences. While both types of organizations are allowed to lobby to some extent, the breadth of permissible activity varies considerably. 501(c)(3) entities can occasionally involve themselves in lobbying, so long as such activity is not a substantial part of their overall operation. In contrast, 501(c)(6) organizations find the path cleared for them to aggressively pursue lobbying, as long as it pertains to their common business interest.
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