A nonprofit is a distinct type of organization that, unlike a commercial business, does not operate for monetary gain. Instead, their funds and efforts go toward supporting a specific cause—such as health advocacy, the arts, or disaster relief. Because of this unique difference, nonprofit organizations are often exempt from federal, as well as some state, taxes. Despite this advantage, these groups still need to meet certain responsibilities with the IRS and maintain detailed records with the help of a professional accountant. If you currently manage a tax-exempt organization or are curious about starting one, here are a few frequently asked questions about the subject that you should review.

What to Know About Nonprofits & Their Tax Responsibilities

Are all nonprofits tax-exempt?

There are many different types of nonprofits and not all of them receive all or any tax exemptions.

For example, a membership-based business league that is registered with a 501(c)(6) status is exempt from federal and some state taxes. But the league isn’t dependent upon donations and, as a result, cannot permit members to claim exemptions for paying their membership dues.

By contrast, a 501(c)(3) charitable organization can extend tax exemptions to donors.

How does an organization get a 501(c)(3) status?

To gain a 501(c)(3) tax-exempt status, organizations must submit an application with the IRS that proves they serve one of many accepted purposes—such as supporting a charity, preventing animal cruelty, providing religious services, or expanding educational resources.

You must also demonstrate that funds are not given to individuals for personal gain beyond fair compensation. In addition, there must be a statement on file that prohibits the organization from using funds for political support.

How are private foundations and public charities different?

Both private foundations and public charities can qualify as 501(c)(3) nonprofits. But while a public charity receives most of its support from members of the public, a private foundation is managed by a much smaller group of individuals.

Since private foundations typically have less oversight than public charities, they are subject to operating restrictions.

Do nonprofits have to file with the IRS?

While an organization may be tax-exempt, they may still have to submit documentation with the IRS and state agencies.

When a nonprofit has an annual income of $50,000 or greater, it must file corresponding 990 forms with the IRS.

Groups with lower incomes may only need to submit an annual electronic notice. Since filing can have a great impact on tax-exempt status, you should have your accountant review your organization’s requirements.

If tax planning is time-consuming for your nonprofit, Burch & Associates offers professional bookkeeping and accounting services to help streamline the process. Supporting clients in Lincoln, NE, these accountants can assist with all tax-exemption matters to keep your organization compliant with both the state and the IRS. To learn more about this firm and the services they provide—including standard business accounting and IRS representation—visit their website. If you’d like to arrange a convenient consultation, call (402) 483-4791.