Nonprofits fall under a variety of different categories, including nonprofit corporations, community chests, and LLCs. In addition to nonprofit corporations, there are also a number of different kinds of tax-exempt organizations, such as 501(c)(3). These organizations qualify for tax deductions if they receive donations and expend all of their funds for their charitable mission. Regardless of their type, nonprofits should be aware of the differences between these three types.
There are various benefits and disadvantages of each of these three types of organizations. Essentially, a nonprofit organization is any organization that does not have profits and is a nonprofit. As such, its investment income is not subject to taxation if its primary purpose is charitable, religious, or scientific. However, the IRS requires nonprofit organizations to submit annual tax returns to them. The process of filing for tax-exemption requires significant time and money. In most cases, the federal tax exemption fee is $500 and a limited number of organizations are exempt from taxes for as little as $150. Tax advisor fees can be significant, too.
Nonprofit organizations often have strict guidelines to meet, and must adhere to, federal income tax exemption requirements. Most of them qualify under one of the 25 subparagraphs of Section 501(c) of the Internal Revenue Code. Some are tax-exempt under Section 501(c)(4) while others are exempt under Section 501(c)(3). However, they may have other taxable or tax-exempt subsidiaries. It is important to understand which types of nonprofit organizations fall under these categories and to understand the difference between them.
While tax-exempt status may make an organization eligible for a federal nonprofit designation, it does not make it completely tax-exempt. Rather, tax-exempt status exempts the organization from paying federal corporate income tax on income that arises from activities that fall outside of its charitable purpose. While a tax-exempt organization is not exempt from federal corporate income tax, it can use its federal exemption to rely on its federal tax exemption to exempt its income from state corporate income taxes.
Once an organization has the proper paperwork to become tax-exempt, it must file its annual IRS Form 990. This 30 page application requires a comprehensive understanding of tax law and record-keeping. It may take a few months to obtain tax-exempt status. However, a letter from the IRS stating that the application is pending is sufficient for many funders. It is important to remember that filing is not an easy process, and there are other steps to follow.
