Non-profit status is a state law concept, and the 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 non-profit organization. However, a non-profit 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.
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 and 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.
Additionally, only tax-exempt non-profit corporations provide donors with an individual tax deduction incentive on all donations given to your non-profit. Additional benefits include low-cost mailing, discounted advertisements, and other private and governmental discounts.
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:
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.
Your non-profit 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. Suppose this unrelated income starts to become a substantial portion of the income earned. In that case, this could attract attention from the IRS and prompt a reconsideration of the 501(c)(3) tax-exempt status.
Additionally, you will not benefit from the value of any assets of the non-profit 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.
Although most state tax-exempt laws are patterned after the Internal Revenue Code, obtaining state exemption is a separate process from obtaining a federal exemption. Even if an organization has obtained federal exemption, it must follow the state franchise tax board's procedures to obtain state tax exemption. In some states, it is possible to obtain a state tax exemption before securing federal exempt status.
The IRS review period can vary considerably depending on such factors as the uniqueness of the proposed exempt purpose and the IRS workload 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 of incorporation.
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, etc.
If you are 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, sales taxes, and property taxes.
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