Holding a nonprofit in the USA brings in a ton of benefits, including tax exemptions. Yes, you read that right!
Nonprofits are exempt from income tax liabilities. However, it does not mean that nonprofits are not required to pay taxes, at all.
Under section 501(c)(3) of the Internal Revenue Code, the nonprofits are required to meet certain obligations to be exempt from taxes for the good.
Essentially, in this article, we will give some insights on how IRS decides if a nonprofit is obligated to pay taxes or not. And consequently, would also help you understand how you can apply for the same if you are also a nonprofit.
Why NonProfits Are Exempted From Taxes?
Nonprofits are usually dedicated to a certain cause. It could be anything that helps the general public. For example, an organization distributing essential medicines to the general public.
However, it is noteworthy that the organization needs to do any of its activities without making personal profits. Obviously, if there are personal interests involved, it does not account for public welfare, and thus not essentially fall under nonprofits.
Conditions In Place By IRS
There are several conditions put in place by the IRS, to ensure that there are no forgeries. For instance, no organization can by-default be exempted from tax obligations, even if it is a nonprofit.
It means that the organizations need to state their status as a nonprofit if they wish to be entitled to tax exemptions.
Likewise, if a nonprofit is involved in any other financial or monetary exchanges, other than what it states in its declaration, it might need to pay income tax. The experts at https://templetonco.com/ explain that nonprofits still need to file for their transactions in any fiscal year, even if they are exempted from tax obligations. Notably, the tax returns filed, would either be null.
How Does IRS Know If A NonProfit Should Pay Taxes?
As already mentioned, no organization is entitled to tax exemptions by default. Essentially, there are several obligations that nonprofits need to fulfill when seeking tax exemptions.
For example, a nonprofit has around 27 months to specify its operations and agenda from the end of the month the organization is set up.
Likewise, charities, churches, employees funds corporations, all fall under different internal revenue codes. And are most likely, to be exempted from tax obligations on different grounds.
Generally speaking, a nonprofit is required to submit Form 1024 to be exempted from tax obligations under section 503(c)(3) of IRS Codes.
It is also noteworthy that the IRS can always revoke an organization’s exemption status. It usually happens when a nonprofit fails to submit any required documents or gets involved in any activity other than its stipulated intent.
It is pretty obvious that nonprofits can leverage their goodwill to save taxes. However, they can only enjoy the benefits as long as they do not do anything questionable to their cause.
It is rather advised to consult with professional tax and accounting personnel to know more. After all, federal and legal matters are always best left in the hands of professionals, who better understand the depths.