What to Know About Taxes and Nonprofits
Making money for stakeholders is the primary goal of for-profit businesses. Nonprofits are different: their primary goal is benefiting their cause. To qualify as a nonprofit, the entity must serve the public good Somehow. No individual or shareholder may profit from the organization, although nonprofits may pay reasonable salaries and expenses related to fulfilling their mission. Nonprofits generally do not pay federal income tax.
Types of Charitable Nonprofits
The Internal Revenue Code 501(c) lists the 29 different types of charitable nonprofits, but most of the estimated 1.5 million nonprofits in the United States qualify as 501(c)(3) charitable organizations. Their missions span myriad religious, educational, charities, scientific and literary goals. Most nonprofits are organized as nonprofit corporations or unincorporated associations, and certain charitable trusts and limited liability companies also may qualify as nonprofits. Donations to these organizations are tax-deductible.
Form 990 or Form 990-PF
Nonprofits generally do not pay federal or state income taxes, and they may be exempt from property taxes. The IRS and the state they operate in must approve their tax-exempt status to get these exemptions.
In addition, most nonprofits other than churches and some church-related organizations need to file Form 990 (or 990-PF if the entity is a private foundation) with the IRS each year. Forms 990 and 990-PF are informational returns that allow the government to reassess the entity’s tax-exempt status annually. Failure to file can result in steep penalties. If an organization fails to file its Form 990 for three consecutive years, it automatically loses its tax-exempt status. There is no appeal process for reinstatement. Instead, the organization has to, in effect, reapply for tax-exempt status.
Tax-Exempt status Doesn’t Mean Exemption from All Taxes.
Note that qualifying for tax-exempt status is not a blanket exemption from all taxes. Nonprofits still need to address the following tax issues:
- An organization’s tax-exempt status doesn’t extend to its employees, and Nonprofits always are responsible for withholding payroll taxes for all of their employees.
- 501(c)(3) charitable organizations are responsible for paying unemployment taxes. They may, however, pay for unemployment claims in one of two ways: by paying state unemployment insurance taxes or as a reimbursing employer paying the state only for claims paid out to former employees.
- Sales and use taxes can be complex. This can be tricky because it is governed mainly by state law. That means nonprofits have to apply for an exemption from these taxes in each state they operate. For most nonprofits, it is enough to use in the state in which they are domiciled. Organizations that operate on a regional or national level may apply for tax-exempt status in multiple states.
Maintaining a tax-exempt status is essential, and understanding the tax issues surrounding that goal is critical. If you have any questions, call us today.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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