4 Basic Questions and Answers About Tax Exemption Issues Affecting CDCs

Excerpts from Feinberg, P, and Rosenblith, S Handbook for Community Economic Development Corporations Washington,DC, LISC Described in IRC, 1998)

Question

What does “tax-exempt status” mean?

Answer

When an organization is described as having “tax-exempt status”, this generally means that the organization is not liable for federal income tax on its net income. This status is based on the fact that the organization fits within one of the numerous categories of special purpose organizations granted favorable treatment under federal tax laws, so-called “Section 501 (c)(3)”

Question

What can a community group do to promote business activities in its neighborhood without affecting is Section 501(c)(3)?

Answer

Business activities being promoted or conducted have to be linked to a defined charitable purpose. Otherwise, they are indistinguishable from regular business activities.

Questions

Can a community economic development group which provides direct assistance to for-profit businesses or entrepreneurs get a tax exemption under Section 501 (c)(3)?

Answer

Yes. The key to making business development activities fit within a charitable framework is to tie such activities to identifiable charitable objectives such as providing employment opportunities to the unemployed; providing financial assistance to businesses owned by members of disadvantaged minority groups who have been unable to obtain financial assistance from conventional sources; or requiring businesses obtaining assistance to upgrade their stores, make changes in their storefronts, etc. (combating or preventing community deterioration).

Question

What political activities are permitted for Section 501 (c)(3) organizations?

Answer

Section 501(c)(3) organizations cannot support or oppose political candidates. No partisan political campaign activities, however minimal are allowed.

Useful Community Economic Development Acronyms

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