In order to qualify for special tax-exempt status under 501 (c)(3), your nonprofit's key purpose has to fall into one of five categories reserved for charitable organizations. These include an organization that has a:
"Charitable Purpose,"
Is a "Religious Group,"
Is a "Scientific Organization,"
Serves a "Literary Purpose," or;
Qualifies as an "Educational Organization."
Qualifying groups pay no tax on federal, state, and local taxes, and therefore can devote a larger proportion of their resources to achieving their particular goals. The status can also qualify groups for special grants or government funding, as well as special rates for services or even postage. Donors prefer contributions to these groups because they can deduct the payments from their own taxes.
Drawbacks to the status include inability to divide profits among members beyond payment of reasonable salaries and limitations on the sources of the group's incomes; and restrictions on the use of assets to purposes justifying tax exemption.