Vol. 7, No. 5, Pg. 26. Sculpting A Nonprofit: Part II.

• Author: By Martin C. McWilliams Jr., Frank W. Cureton and Shawn M. Flanagan

South Carolina Lawyer

1996.

Vol. 7, No. 5, Pg. 26.

Sculpting A Nonprofit: Part II

26Sculpting A Nonprofit: Part IIBy Martin C. McWilliams Jr., Frank W. Cureton and Shawn M. FlanaganThe formation of nonprofit corporations under South Carolina's new Nonprofit Corporation Act (Act) was discussed in an article on this subject, which was published in the May/June 1995 issue of South Carolina Lawyer.

This article will discuss the tax-exempt status of nonprofit corporations under federal and South Carolina income tax laws. There are actually two questions here:

1. Will the nonprofit corporation itself be exempt from having to pay income tax on dues, donations, grants and other receipts? 2. Will contributions to the nonprofit corporation be deductible by donors for income tax purposes?

The answer to the first question will be governed largely by § 501(c) of the Internal Revenue Code (Code). Section 170 of the Code controls the answer to the second question. This distinction is critical. It is quite possible for a nonprofit corporation to be exempt from having to pay income tax, but for contributions to that nonprofit not to be deductible by donors.SECTION 501(C) GENERALLY

Twenty-five categories of organizations are exempt from income taxes under § 501(c).

28(State instrumentalities are tax exempt based on § 115 and constitutional law, which forbids the federal government from taxing a state.)

If a nonprofit fits within any of the § 501(c) categories, the nonprofit will be exempt from federal income taxes. Also, a nonprofit that is exempt under § 501(c) is automatically exempt from South Carolina income tax under South Carolina Code § 127-430(h). Nonprofit corporations organized and operated for religious, charitable, scientific, literary or educational purposes seek to qualify specifically under § 501(c)(3).

Section 501(c)(3) status not only affords the nonprofit an exemption from income taxes, but also most nonprofits that meet the requirements of § 501(c)(3) will meet the requirements of § 170 (c), meaning that contributions to that nonprofit will be deductible by its donors. As a bonus, § 501(c)(3) nonprofits and their directors are entitled to the liability protections set forth in South Carolina Code §§ 33-31-834 and 33-56-180, discussed in the previous article.

Although this article will focus on § 501(c) (3) nonprofits, the other categories of exemption should not be ignored. For example, an organization operated exclusively for the promotion of social welfare is exempt under § 501(c) (4). Unlike § 501(c)(3) organizations, a § 501(c)(4) organization can engage in substantial lobbying and can participate in political campaign...