501c3 Exempt Purpose – Review Before You File

501c3 Purpose Statements: What are the limits?

The answer to this question boils down to one thing, compliance with IRS Code section 501(c)(3).  Under section 501(c)(3) a tax-exempt nonprofit is required to have a complying purpose statement. To determine if an organization complies with section 501(c)(3) the Organizational test is applied.  To meet the Organizational test, the organization’s purpose must be specified in its articles of incorporation (the document that was filed at the state level to legally form the nonprofit corporation).  The purpose of the organization may be as broad as or more specific than the purposes actually stated in IRS 501(c)(3).  Below is a code except from US CODE 201o Title 26 Section 501 (c) (3).

[O]rganized . . . exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the pro- vision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.

Narrow and board purpose statements provided by the IRS

A Board Purpose Statement – “Charitable and educational purposes within the meaning of IRS 501(C)(3).”  NOTE: This extremely broad making the very outer limits of the purpose statement the actual code section definition.  This is the broadest a purpose statement could be.

A Narrow Purpose Statement – “To grant scholarships to deserving freshman college students residing in Jefferson County.” NOTE: This is a very narrow purpose statement, limiting who and where a beneficiary of the organization will live and go to school.  You be careful in making purpose statements too narrow as the IRS maybe view the purpose of your organization as serving a private interest and not a public interest.

The previous examples are considered to be exempt purposes by the IRS. However, if the purpose statement includes any non-exempt purposes it will taint the entire purpose statement and the organization will not be considered exempt under section 501(C)(3).  Typically, you see this when the purpose statement allows for the conveyance of some type of private benefit.

An example of a tainted purpose statement would be – “Test established to make annual payments to exempt charities and to use a fixed sum for the care of the founding trustee’s burial.”  NOTE: This would not be considered an exempt purpose by the IRS under section 501(C)(3) because the private benefit conveyed to the founding trustee is beyond the allowed purposes of 501(c)(3).  That one private benefit taints the entire purpose statement.

The last type of purpose statement error is when purpose statements are too general or ambiguous.  When purpose statements are too ambiguous the IRS cannot determine if the purpose is tax-exempt and thus would not meet the organizational test.

An example of an ambiguous purpose statement – “To operate a hospital.” This is too ambiguous.  Operating a hospital could be an exempt purpose or could be taxable depending on the manner in which the hospital is operated.

Typically one of the best ways to pass the organizational test when you are preparing your 501c3 Application is to amend your articles of incorporation to include a purpose statement inline with IRS 501(c)(1) by stating the organization’s purpose is – “exclusively for religious, charitable, scientific, literary, or educational purposes within the meaning of 501(c)(3)”.

When you are starting your 501c3 tax-exempt organization keeps in mind how important it is to have a properly drafted purpose statement for your organization’s articles of incorporation.

Let me know your thoughts or questions below.

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