How Do Taxes Work For Non-Profits?

By Piyush Kadam2 min read · Posted Jun 24, 2023

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Nonprofits are essential to our society because they provide a vital source of support to those in need, offering services in education, health care, welfare, and more. Due to this importance, understanding how taxes work for these nonprofit organizations is critical.

Requirements for a Tax Exemption

In the United States, most nonprofits are eligible to be exempt from taxes from the IRS due nonprofits' purpose of doing social good rather than operating a business for profit. When it comes to taxes, there are a few key concepts that every nonprofit should understand to ensure that their organization complies with all relevant tax exemption guidelines. Most nonprofits are exempt from federal income taxes, meaning they do not need to pay taxes on their income from donations, grants, or any other income. These organizations can do this by applying for tax exemption status to get an exemption from federal income taxes and then ensuring that the organization does activities and operates solely under the purposes they listed to apply for the exemption status.

Additionally, nonprofits can apply for a state sales tax exemption, which allows them to avoid the cost of state sale taxes that come with buying things under your organization's name. Nonprofits can also apply for a property tax exemption for the land that the organization uses. Nonprofit organizations may have to pay employment taxes, even if they are exempt from federal income taxes.

Exemption Statuses

To apply for these exemption statuses under the IRS, the organization can choose from multiple categories to suit their needs which are a 501(c)(3), 501(c)(4), and 501(a).

501(c)(3): This status is for organizations that serve religious, charitable, scientific, educational, or literary purposes. Being so broad, this status is also the most common type. This status has some restrictions, including the political and legislative lobbying activities it may conduct.

501(c)(4): This status is for social welfare organizations that promote the common good and welfare of the community. This type of status has fewer political and legislative lobbying restrictions than a 501(c)(3).

501(a): This status is for every other type of organization that may have a more specific purpose. For example, a 501(c)(7) status is for organizations that are more social and recreational, and a 501(c)(13) status is for cemetery companies.

The Application Process

These organizations have to complete forms such as Form 990 and 1023. The organizations must complete these forms accurately to ensure that any other pending taxes are paid on time. After the organizations get the exemption status, they must keep up with the dynamic guidelines to ensure their organization is still compliant with the regulations.

Conclusion

Nonprofits are vital organizations that have a necessary, unique tax status that allows them to operate and not pay income taxes. There are many exemption statuses that each caters to the organization's purpose, and each status has different guidelines. Although the process is tricky and sometimes overwhelming, when followed correctly, it will ultimately help the organization to further its cause.

References

About The Author

Piyush Kadam

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Hello, my name is Piyush, an Article Writer for Pitch Labs. With my passion for writing combined with my love for business, I hope my articles will make some impact, big or small, on budding entrepreneurs.

See more posts by Piyush Kadam

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Our organization cannot give out official legal/fiscal guidance. All articles are written by volunteers and it may be beneficial to contact professionals to assist your understanding of the information and to guide your action. Pitch Labs bears no responsibility for the results of actions taken based off of article content or any other form of assistance given.