What Is a 501(c)(3) Organization?

Section 501(c)(3) is a portion of the U.S. Internal Revenue Code (IRC) and a specific tax category for nonprofit organizations. Organizations that meet Section 501(c)(3) requirements are exempt from federal income tax. While the Internal Revenue Service (IRS) recognizes more than 30 types of nonprofit organizations, only those that qualify for 501(c)(3) status can say that donations to them are tax deductible.

Most of the organizations that may be eligible for 501(c)(3) designation fall into one of three categories: charitable organizations, churches and religious organizations, and private foundations. The rules outlined in Section 501(c)(3) are regulated by the U.S. Treasury through the IRS.

How a 501(c)(3) Organization Works

To be considered a charitable organization by the IRS, a group must operate exclusively for one of these purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.

Furthermore, the IRS defines “charitable” activities as “relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

Requirements of a 501(c)(3) Organization

To be tax exempt under Section 501(c)(3), an organization must not be serving any private interests, including the interests of the creator, the creator’s family, shareholders of the organization, other designated individuals, or other persons controlled by private interests. None of the net earnings of the organization can be used to benefit any private shareholder or individual; all earnings must be used solely for the advancement of its charitable cause.

A 501(c)(3) organization is also forbidden from using its activities to influence legislation in a substantial way, including participating in any campaign activities to support or deny any particular political candidate. It is typically not permitted to engage in lobbying (except in instances when its expenditures are below a certain amount).

People employed by the organization must be paid “reasonable compensation,” which is based on the fair market value that the job function requires.

To remain tax exempt under Section 501(c)(3), an organization is also required to remain true to its founding purpose. If an organization has previously reported to the IRS that its mission is to help less privileged individuals gain access to a college education, it must maintain this purpose. If it decides to engage in another calling—for example, sending relief to displaced families in poverty-stricken countries—the 501(c)(3) organization has to first notify the IRS of its change of operations to prevent the loss of its tax-exempt status.

While some unrelated business income is allowed for a 501(c)(3) organization, the tax-exempt charity may not receive substantial income from unrelated business operations. This means that the majority of the firm’s efforts must go toward its exempt purpose as a nonprofit organization. Any unrelated business from sales of merchandise or rental properties must be limited or the organization could lose its 501(c)(3) status. While the IRS doesn’t specify exactly how much is too much unrelated business income, the law firm of Hurwit & Associates, which specializes in representing nonprofits, estimates the amount at somewhere between 15% and 30%.

While organizations that meet the requirements of Section 501(c)(3) are exempt from federal income tax, they are required to withhold federal income tax from their employees’ paychecks and pay Social Security and Medicare taxes. They do not, however, have to pay federal unemployment taxes.

Special Considerations

Organizations that meet the 501(c)(3) tax category requirements can be classified into two categories: public charities and private foundations. The main distinction between these two categories is how they get their financial support. 

Public Charity

A public charity is a nonprofit organization that receives a substantial portion of its income or revenue from the general public or the government. At least one-third of its income must be received from the donations of the general public (including individuals, corporations, and other nonprofit organizations).

If an individual donates to an organization that the IRS considers to be a public charity, they may qualify for certain tax deductions that can help them lower their taxable income. Generally, the total amount of donations to a tax-exempt public charity that an individual can claim is limited to 50% of their adjusted gross income (AGI). However, there is no limitation on donations to qualified charitable organizations, such as a 501(c)(3).

Private Foundation

A private foundation is typically held by an individual, a family, or a corporation and obtains most of its income from a small group of donors. Private foundations are subject to stricter rules and regulations than public charities. All 501(c)(3) organizations are automatically classified as private foundations unless they can prove they meet the IRS standards to be considered a public charity. The deductibility of contributions to a private foundation is more limited than donations for a public charity.

To apply for tax-exempt status under Section 501(c)(3), most nonprofit organizations are required to file Form 1023 or Form 1023-EZ within 27 months from their date of incorporation. The charitable organization must include its articles of incorporation and provide documents that prove that the organization is only operating for exempt purposes.

However, not all organizations that qualify for the tax category need to submit Form 1023. For example, public charities that earn less than $5,000 in revenue per year are exempt from filing this form. Even though it is not required, they may still choose to file the form to ensure that donations made to their organization will be tax deductible for donors.

Advantages and Disadvantages of a 501(c)(3) Organization

The 501(c)(3) status offers a myriad of benefits to the designated organizations and the people they serve. For starters, 501(c)(3) organizations are exempt from paying federal income and unemployment taxes, and patrons who donate to them are allowed to claim a tax deduction for their contributions.

To help with funding and further their mission, these organizations are eligible to receive government and private grants. To qualify, the organization must have a mission aligned with the purpose of the grant and a need for it. In addition, 501(c)(3) organizations often receive discounts from retailers, free advertising by way of public service announcements, and food and supplies from other nonprofit organizations designed to help in times of need.

A 501(c)(3) could be the lifelong dream of its founder; however, once established as a 501(c)(3), it no longer belongs to its founder. Rather, it is a mission-oriented organization belonging to the public. To maintain its favorable tax treatment, it must operate within the confines of the law pertaining to 501(c)(3) organizations.

Because the organization serves the public, it must operate with full transparency. Therefore, its finances, including salaries, are available to members of the public and subject to their review.

Example of a 501(c)(3) Organization

The American Red Cross, established in 1881 and congressionally chartered in 1900, is one of the United States’ oldest nonprofit organizations. Its mission statement says that the Red Cross “prevents and alleviates human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.” Since its inception, its goal has been to serve members of the armed forces and provide aid during disasters.

Located in 191 countries, the Red Cross operates the largest network of volunteers in the world. This 501(c)(3) organization is segmented into three divisions: the National Red Cross and Red Crescent Societies, the International Federation of Red Cross and Red Crescent Societies, and the International Committee of the Red Cross.

The National Red Cross and Red Crescent Societies, which include the American Red Cross, aim to relieve human suffering globally by empowering subordinate organizations to operate within their nation’s borders to provide disaster relief, education, and other related services. The International Federation of Red Cross and Red Crescent Societies provides global humanitarian aid during peacetime, such as assisting refugees. The International Committee of the Red Cross provides humanitarian relief for people affected by war or other armed conflicts.

People who itemize their tax deductions can contribute to the Red Cross and claim the amount donated as a deduction. Taxpayers who use the standard deduction may still claim up to $600 of their 501(c)(3) contributions as a tax deduction in 2021.

The Bottom Line

501(c)(3) organizations are nonprofit groups with a dedicated mission. Most people are familiar with them as churches and charities, but they also include private foundations. As long as they operate to support their mission, they receive favorable tax treatment, such as avoiding federal income and unemployment taxes.

What Is an Appraisal Management Company (AMC)?

An Appraisal Management Company (AMC) is an independent entity through which mortgage lenders order residential real estate valuation services for properties on which they are considering extending loans to homebuyers.

AMCs fulfill an administrative function in the appraisal process, including selecting an appraiser and delivering the appraisal report to the lender. Individual appraisers who work for AMCs provide the actual property valuation services.

Understanding Appraisal Management Companies (AMC)

AMCs have been a part of the real estate landscape for the past 50 years. However, their numbers remained limited until the financial crisis of 2007 to 2008.

In 2009, the New York Attorney General, government-sponsored enterprises Freddie Mac and Fannie Mae, and the Federal Housing Finance Agency (FHFA) established the Home Valuation Code of Conduct (HVCC) appraisal guidelines. The HVCC guidelines, no longer on the books, laid the foundation for the appraiser independence found in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Truth in Lending Act. Laws obligating lenders to use independent appraisers led to a sharp rise in the use and number of AMCs.

The HVCC and later federal regulation sought to limit the amount of direct contact that lenders could have with appraisers. Essentially, the U.S. federal government created appraiser independence requirements to prevent lenders from influencing appraisers to inflate property values, a problem believed to have contributed to the housing crisis.

With an AMC, mortgage brokers, loan officers, nor homeowners may select the appraiser for the property on which they want to lend/borrow funds. Since the former parties have a financial interest in the transaction, there is a risk they might attempt to influence the appraiser to assign a higher value to the property than market conditions support so the transaction will go through.

Appraisal Management Company (AMC) Requirements

AMCs maintain a pool of state-licensed or state-qualified appraisers to meet requests from lending institutions. An appraiser is then assigned to provide an appraisal report for the property.

AMC appraisers are not provided with any prior information regarding the property or put in contact with the lending institution. The appraiser’s assessment must meet the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines. If there are any issues, the AMC can legally assist.

What Does Accredited in Business Valuation Mean?

Accredited in Business Valuation (ABV) is a professional designation awarded to a certified public accountant (CPA), who specializes in calculating businesses’ value. The ABV certification is overseen by the American Institute of Certified Public Accountants (AICPA). It requires candidates to complete an application process, pass an exam, meet the minimum business experience and education requirements, and pay a credential fee. As of 2021, the annual fee for the ABV Credential was $380.

Maintaining the ABV credential also requires those who hold the certification to meet minimum work experience standards and lifelong learning. Successful applicants earn the right to use the ABV designation with their names, improving job opportunities, professional reputation, and pay.

How Accredited in Business Valuation Works

The Accredited in Business Valuation credential is awarded to CPAs who demonstrate considerable knowledge, skill, and business valuation experience. The study program to become an ABV covers the basic business valuation process, professional standards, qualitative and quantitative analysis, valuation analysis, and other related topics, such as financial reporting and litigation.

Accredited in Business Valuation Requirements

Candidates seeking ABV accreditation must have a valid (and unrevoked) CPA license or certificate issued by the appropriate state authority. They must also pass the ABV Examination, with some exceptions. For example, this requirement is waived in the case of AM (Accredited Member of the ASA) and ASA (Accredited Senior Appraiser) credential holders of the American Society of Appraisers, CFA (Certified Financial Actuary) holders, and CBV (Chartered Business Valuator) credential holders of the Canadian Institute of Chartered Business Valuators.

Every three years, ABV professionals must complete 60 hours of continuing professional education. They must also pay an annual fee of several hundred dollars.

Business Experience and Education Requirements For Candidates

Business Experience

ABV candidates must have obtained a minimum of 150 hours of BV experience within the five years preceding the credential application date. Candidates may also apply a maximum of 15 experience hours by completing the hands-on business valuation case study track at the AICPA Forensic and Valuation Services Conference.

Education Requirement

ABV candidates must complete 75 hours of valuation-related continuing professional development (CPD). All hours must be obtained within the 5-year period preceding the date of the ABV application.

Accredited In Business Valuation Exam

The ABV Exam is conducted by computer and consists of two parts. Both parts must be passed in 12 months (based on passing the first part) to receive ABV credit.

Applicants are given three hours and 15-minutes to complete each section of the test, including a 15-minute break. The exam consists of 90 multiple-choice questions per module, and much of the exam are discrete multiple-choice questions (78 in total). A dozen questions are case studies with accompanying multiple-choice answers. These questions are meant to test a candidate’s analytical aptitude and apply valuation theory and methodology.