501(c)3 Tax Exemption FAQ's
What are the differences between tax-exempt and nonprofit
Non-profit status is a state law concept.
Non-profit status may make an organization eligible for certain
benefits, such as state sales, property, and income tax exemptions.
Organizing as a non-profit organization at the state level
does not automatically grant the organization exemption from
federal income tax.
A federal “tax-exempt organization” is a unique
entity that is usually a nonprofit organization. However,
a nonprofit organization cannot be exempt from Federal and
State income or franchise tax until the organization applies
for an exemption and the IRS and the state franchise board
issues a determination of exemption.
Why form a tax-exempt
Being organized as a tax-exempt corporation
is a common requirement for obtaining grant funds from government
agencies and private foundations. Generally, tax-exempt government
foundations as well as private foundations and charities are
required by their own operating rules and by IRS regulations
to donate their funds only to 501(c)(3) tax-exempt organizations
or else forfeit their own tax-exempt status.
Additionally, only tax-exempt nonprofit
corporations provide donors with the incentive of an individual
tax deduction on all donations given to your nonprofit. Additional
benefits include, low cost mailing, discounted advertisements,
and other private and governmental discounts.
Does my corporation
qualify as a tax-exempt nonprofit?
To qualify for exemption under the Internal
Revenue Code, your organization must be organized for one
or more of the purposes specifically designated in the Code.
For an organization to qualify under a 501(C)(3) exemption,
it must be organized for one or more of the following purposes:
- Testing for public safety
- Fostering national or international amateur sports
The prevention of cruelty to children or animals
Additional tax exemptions exist under separate
sections of the IRC for groups including: labor unions, chambers
of commerce, social and recreational clubs, fraternal societies,
civic leagues, credit unions, farmers’ coops and mutual
insurance companies, and legal service organizations. LegalFilings
also provides tax exempt filings for these types of organizations
What are the
disadvantages of forming a tax-exempt nonprofit?
Your nonprofit income activities will be
in most part restricted to the stated purpose of your tax-exempt
basis. Income from sources unrelated to the purpose of the
organization will be taxable. If this unrelated income starts
to become a substantial portion of the income earned, this
could attract attention from the IRS and prompt a reconsideration
of the 501(c)(3) tax-exempt status.
Additionally, you will not be able to benefit
from the value of any assets of the nonprofit corporation.
All assets of the corporation must be dedicated to tax-exempt
purposes. Upon dissolution of the corporation, all assets
must be distributed to other 501(c)(3) corporations.
Furthermore, payments of dividends to shareholders
or payments of profits to directors, officers, members or
staff are prohibited, however reasonable salaries are allowed.
Can a nonprofit
corporation make a profit?
Yes. A nonprofit corporation can take in
more money than it spends. It can use the tax free profits
for its own operating expenses including salaries. What a
nonprofit corporation cannot do is distribute any profits
to officers, directors or employees.
Am I required
to file both federal and state exemptions?
Although most state tax exempt laws are
patterned after the Internal Revenue Code, obtaining state
exemption is a separate process from obtaining federal exemption.
Even if an organization has obtained federal exemption, it
must follow the procedures of the state franchise tax board
to obtain state tax exemption. In some states, it is possible
to obtain state tax exemption before securing federal exempt
How long does
it take for the IRS to approve the application?
Our experience is the IRS review period
can vary considerably depending on such factors as the uniqueness
of the proposed exempt purpose and the workload of the IRS
in this area. The IRS usually issues the exemption recognition
ruling in approximately 2 to 6 months, however in most circumstances
the recognition of exempt status is retroactive to the date
Is there more
than one category of tax-exempt organizations?
Yes. The Internal Revenue Code (IRC) Section
501(c)(3) public charity or private foundation is meant to
serve religious, educational, charitable, scientific and literary
organizations, among others. Organizations that are given
the status of IRC Section 501(c)(4)-(27) are tax-exempt, but
not charitable. They could be trade associations, social clubs,
If my nonprofit
is tax-exempt, do I pay any type of taxes?
If you’re a private foundation, you
will have to pay tax on your investment earnings and the minimum
undistributed grant allocations, and “unrelated business
income.” You will also have to pay federal and state
employment taxes, and sales and/or property taxes.