Nonprofits set out to serve the public or a group in a charitable manner. For that reason, they follow different tax laws than many other businesses. Review the following guide to better understand the basics of nonprofit tax codes. 

A Guide to Tax Laws for Nonprofits

Are all nonprofits federal tax-exempt?

The Internal Revenue Service (IRS) reserves the 501(c) tax code for nonprofit organizations. This special designation eliminates federal tax liability for qualifying organizations. The entity must apply and be approved by the IRS to obtain tax-exempt status. 

What are the criteria?

There are two main requirements of a 501(c) organization. Firstly, its primary purpose must be humanitarian or educational in nature. Secondly, all income must be put toward that main operation’s goal, including funding services, donating to other charitable organizations, or covering employee wages. 

Aside from the basic requirements, there are criteria based on the type of organization. There are multiple types of 501(c)s, ranging from 1 to 29. The most common are 501(c)(3) — charitable, religious, and educational groups — and 501(c)(4), which are social welfare organizations. 

Are there other tax exemptions?

The 501(c) tax code only applies to federal taxes, but many states offer their own version for nonprofit organizations. The requirements may differ from the federal guidelines.

For example, Texas tax law allows 501(c) organizations to avoid franchise tax, and 501(c)(3), (4), (8), (10,) and (19) are also exempt from sales tax. However, organizations must still apply for the state tax exemption to qualify. 

What are the exceptions?

As with all areas of tax law, there are exceptions to the exempt rule. A nonprofit may face taxes on income earned that's not directly related to their main mission. Additionally, the organization is still responsible for FICA taxes for employees. 

For assistance navigating the tax system, reach out to Corey C. Davis, CPA, in Kerrville, TX. This law firm is well-versed in both the legal and accounting side of tax law. This unique combination provides Texas Hill Country residents and businesses with a valuable advantage for planning and preparation. Review the legal team's services online or call (830) 257-8800 to request tax return help.