Section 501(c)(3) of the Internal Revenue Code provides for tax exemption for charitable, literary, educational and certain other organizations. A 501(c)(3) organization is exempt from federal income tax (except on income from unrelated trades or businesses), and contributions to it are generally tax-deductible.
All states provide for the same exemption from state income taxes, and contributions are usually deductible except in states that base taxes on adjusted gross income and therefore allow no deductions. Many states exempt charitable and educational organizations from the payment of sales taxes on purchases of goods and services, but these exemptions are often narrower than the 501(c)(3) criteria.
To qualify, an organization must be "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes". The organization must not be operated for private benefit, and any profits must be used for its exempt purposes. The Internal Revenue Service has frequently recognized SF conventions as organized and operated for educational purposes. It has also rejected applications from conventions that, in its view, were primarily social gatherings or commercial ventures.
In 1985 fandom was shaken (a little bit, anyway) by the IRS's rejection of a request for 501(c)(3) status by St. Louis Science Fiction Limited, the parent body of Archon. The fundamental problem was that they didn't qualify and didn't even come close to qualifying. See Archon Tax Exemption Problems for more details.
With exceptions not pertinent to SF conventions, obtaining an IRS determination letter is a condition for 501(c)(3) status. The application is non-trivial and is best done with the help of someone experienced in the process.
All 501(c)(3) organizations must file annual reports with the IRS. The form to be filed (990, 990-EZ or 990-N) depends upon the organization's gross receipts. Failure to file for three consecutive years results in the automatic loss of 501(c)(3) status as well as monetary penalties.
Alternatives to operating under section 501(c)(3) include -
- Section 501(c)(4) (not-for-profit "civic leagues" or "social welfare organizations"; in practice much like section 501(c)(3), but an IRS determination letter is not required and contributions are not deductible);
- Section 501(c)(7) ("clubs organized for pleasure, recreation, and other nonprofitable purposes"; investment income is taxable, but profits from operations are exempt);
- a taxable not-for-profit corporation (feasible for conventions that make little profit);
- informal association outside the tax system (feasible if the convention is small and makes no money, risky otherwise).
See also Tax-exempt status