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  Tax Exemption Home: Non Profit / Exemption Information: 501c3 FAQ's
 

501c3 FAQ's

 
1. What are the differences between non-profit corporations and tax exempt corporations?
2. What are the benefits of forming a tax exempt non-profit organization?
3. Does my corporation qualify as a tax-exempt nonprofit?
4. Are there disadvantages to forming a tax exempt non-profit organization?
5. Is a non-profit corporation able to make a profit?
6. Is it a requirement to file for a state exemption?
7. How long does it take for the IRS to approve the exempt application?
8. Does a tax exempt non-profit have to pay taxes?


1. What are the differences between tax-exempt and nonprofit corporations?

If a company holds a non-profit status, it's able to take part in many benefits. This includes the ability to take advantage of property, income, state, and sales income tax exemptions. It's important to note that while a company may become non-profit at the state level, there are no guarantees that the organization will be able to take advantage of federal income tax exemptions.

Many non-profit organizations are a federally tax exempt. In order to take advantage of federal and state income exemptions, an organization must apply for an exemption. Both the IRS and the state franchise board must approve this status.


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2. What are the benefits of forming a tax exempt non-profit organization?

In order to take advantage of private and government based grants, most organizations are required to have a tax exempt corporation status. In many cases, there are regulations in place that require charities, private foundations, and government grant foundations to make donations only to 501c3 tax exempt organizations. If these rules are broken, foundations may lose their own tax exempt status.

Tax exempt non-profit organizations are also able to offer donors the ability to make tax deductible donations. This can help to bring in more donations. Other benefits include discounted advertising, bulk mail discounts, and other government and private savings.

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3. Does my corporation qualify as a tax-exempt nonprofit?

In order to take advantage of this status, you must meet requirements that are outlined in the Internal Revenue Code. In order to be 501c tax exempt, an organization must function for one of the following purposes:

  Charitable
  Religious
  Educational
  Scientific
  Literary
  Testing for Public Safety
  Fostering national or international amateur sports competition
  The prevention of cruelty to children or animals

There are also other organizations that are able to take advantage of tax exemption status. These include chambers of commerce, fraternal societies, labor unions, social and recreational clubs, civil leagues, legal service organizations, credit unions, and farmers' corps and mutual insurance companies.

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4. Are there disadvantages to forming a tax exempt non-profit organization?

Your nonprofit income activities will be in most part restricted to the stated purpose of your tax-exempt basis. Income from sources unrelated to the purpose of the organization will be taxable. If this unrelated income starts to become a substantial portion of the income earned, this could attract attention from the IRS and prompt a reconsideration of the 501(c)(3) tax-exempt status.

Additionally, you will not be able to benefit from the value of any assets of the nonprofit corporation. All assets of the corporation must be dedicated to tax-exempt purposes. Upon dissolution of the corporation, all assets must be distributed to other 501(c)(3) corporations.

Furthermore, payments of dividends to shareholders or payments of profits to directors, officers, members or staff are prohibited, however reasonable salaries are allowed.

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5. Is a non-profit corporation able to make a profit?

Yes, this is possible. The corporation can bring in more money than it spends. The tax free profits can be used to handle operating expenses. A non-profit corporation is unable to give away its profits to directors, employees, and officers.

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6. Is it a requirement to file for a state exemption?

It's important to note that applying for state and federal exemptions are two completely different processes. Once a corporation has obtained federal tax exemption status, it must follow separate procedures to obtain state tax exemption status. Depending on the state, it may be possible to first obtain a state tax exemption before completing the process of applying for a federal exemption status.

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7. How long does it take for the IRS to approve the exempt application?

The approval process time period can vary greatly. This can depend on how previous work the IRS has to complete as well as the uniqueness of the organization's exemption purpose. It generally takes between 2 and 6 months to receive an approval. In many cases, the recognition of an organization's exemption status is backdated to the time in which it was incorporated.

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8. Does a tax exempt non-profit have to pay taxes?

There are still tax responsibilities that must be met. If you are a private foundation, you will be required to pay taxes based on the investment earnings that you've made and the minimum undistributed grant allocations. You will also be required to pay taxes based on any unrelated business income that you may have. Additionally, you will have state and federal employment tax responsibilities, as well as the need to pay property taxes.

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