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Nonprofit is Not the Same as Tax-Exempt

If an organization receives nonprofit status from the state upon its organization, it must take another step if it wishes to have the ability to accept tax-deductible contributions from potential donors. It must apply to the Internal Revenue Service for tax-exempt status. Many are unaware that nonprofit and tax-exempt are not interchangeable terms.

When an organization that will operate as a nonprofit corporation is initially formed, it applies to the state for a corporate charter as a nonprofit corporation. This assures that any excess revenues received over expenses incurred will not be taxable income to the organization or its owners. This status does not confer on the organization the right or ability to accept tax-deductible contributions from outsiders.
In order to be tax-exempt an organization must file an application with the IRS. There are 29 different categories of tax-exempt organizations recognized by the IRS. The National Football League, the local Chamber of Commerce, labor unions, social clubs, social welfare organizations, educational institutions, and religious organizations are among the different types of tax-exempt organizations recognized by the IRS. Churches are considered 501(c)(3) organizations, and are automatically qualified as tax-exempt so they do not have to file an application for tax-exempt status. This applies only to churches and not to other religious organizations. It should be noted that an organization may have a federal tax ID number and not be a tax-exempt organization. All IRS tax-exempt organizations must file an annual tax return with the IRS. In some cases a very small organization may merely be required to file an electronic “postcard” returns that basically alerts the IRS to its continued existence. It is Form 990-N and must be filed electronically. Others would file a 990EZ or a 990, depending on the size of the organization.
By far the most common type of tax-exempt organization is the 501(c)(3) which are charitable, religious, or educational institutions. Thus, organizations such as a church, a college or university, and the United Way are all 501(c)(3) organizations. Within the 501(c)(3) category organizations may be further classified as public charities, private foundations or private operating foundations.
But there is one distinctive feature of the 501(c)(3). It is the only tax-exempt organization that may accept tax deductible contributions. Without that classification, contributions made to such an organization may not be deducted on the donor’s tax return. Before donating to an organization, a potential donor may wish to ascertain the status of the organization. The IRS maintains a listing, Publication 78, that has the name and Federal Tax ID number of every 501(c)(3) organization. It is published online only. Because churches are not required to file for 501(c)(3) status, some are not on this list. When this is encountered, one must simply look at the organization and see if it is a church based upon activities that it undertakes.
If you are an officer of a nonprofit organization, be sure that the organization has received tax-exempt status from the IRS and that the annual filing obligations for the organization are met. If you are a potential donor, you should take steps to determine if the organization is an IRS tax exempt organization when there is any doubt.
This article was originally published by TaxConnections
Author: Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Published: May 4, 2015

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