Technically Speaking, What is a Charity?

America has more than 1.57 million tax-exempt organizations. That makes us home to the largest nonprofit sector in the history of mankind! But not all of these are technically charities. In fact, the nonprofit tax code encompasses more than 30 different types of organizations including: charities, private foundations, credit unions, fraternal associations, and teachers’ retirement fund associations. At a high level, the breakdown of these different nonprofits is as follows:

• 1,097,689 public charities
• 105,030 private foundations
• 368,337 are other types of nonprofits

It is important for donors to understand the differences in these various types of nonprofits. For one, donations to only certain types of nonprofits qualify for a tax deduction.  But also, different types of nonprofits operate in different ways, file different information with the IRS annually, and thus may not be rated by Charity Navigator.

More specifically:

• We only evaluate organizations granted tax-exempt status under section 501(c) (3) of the Internal Revenue Code and that file a full Form 990. 501(c) (3) organizations are considered public charities and all donations to them are tax-exempt.
• We do not evaluate 501(c) (4) organizations, like the ACLU. In general, 501(c) (4) organizations are allowed to spend a substantial portion of their revenue on lobbying our government and not every donation to them is tax-deductible. However, these groups sometimes establish an affiliated 501(c) (3), like the ACLU Foundation, which we may be able to rate.
• We do not evaluate private foundations. Private foundations, like the Bill & Melinda Gates Foundation, Donald J Trump Foundation and Ford Foundation, receive the majority of their money from only one individual, family or corporation. This differs from the public charities that Charity Navigator evaluates. Public charities have a broad-base of support from the general public as well as variety of other funding sources. The IRS requires that private foundations file a Form 990-PF which differs from the document public charities file. This makes it impossible for us to compare the financial performance of private foundations to public charities.
• Some charities may have “Foundation” in their name, but actually are a 501(c) (3) public charity such as the Livestrong Foundation, Clinton Foundation and Breast Cancer Research Foundation. As long as they meet all our other criteria for an evaluation, then we will rate these charities.

So, what does all of this mean to donors?

1. There are literally a million choices for donations. Make sure you take the time to vet your options and support only those high-performing charities that exactly match your specific philanthropic interests.
2. As part of due diligence before donating, be sure to look up the organization’s classification under the tax-exempt listings. And if you want to deduct your generosity from your next tax return, then make sure you are only giving to nonprofits that are classified as 501(c) (3) public charities (every rated organization on Charity Navigator’s website meets this criteria).