Commonly asked questions about 501c3 tax-exempt organizations:

What are the differences between non-profit corporations and tax-exempt corporations?

If a company holds a non-profit status, it can take part in many benefits, including 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 take advantage of federal income tax exemptions.

Many non-profit organizations are federally tax-exempt. 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.

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

To take advantage of private and government-based grants, most organizations must 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 tax-exempt status.

Other benefits include discounted advertising, bulk mail discounts, and other government and private savings.

Does my corporation qualify as a tax-exempt non-profit?

To take advantage of this status, you must meet the requirements outlined in the Internal Revenue Code. 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

Other organizations can 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, farmers' corps, and mutual insurance companies.

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

Your non-profit income activities will need to be substantially restricted to the stated purpose of your tax-exempt basis. Income from sources unrelated to the purpose of the organization will be taxable. Suppose this unrelated income starts to become a substantial portion of the income earned. In that case, this could attract attention from the IRS and prompt a reconsideration of the 501(c)(3) tax-exempt status.

Additionally, you will not benefit from the value of any assets of the non-profit 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.

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.

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 get 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 federal exemption status.

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

The approval process period can vary greatly, depending on how previous work the IRS has to complete and the uniqueness of the organization's exemption purpose. It generally takes between 2 and 6 months to receive approval. In many cases, recognizing an organization's exemption status is backdated to the incorporation date.

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 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.