Under section 501(c) of the IRS tax code, qualifying nonprofit organizations do not have to pay certain kinds of taxes. A nonprofit is generally an organization that works to improve conditions in society or advocate for a specific cause that would benefit others. The subject of nonprofits, taxation, and tax returns can be complicated; learn more about it with answers to frequently asked questions.

Answers to Common Questions About Taxes & Nonprofits

What is a tax-exempt status?

Approved nonprofits receive tax-exempt status, which means they are not required to pay federal income taxes. They are often exempt from some state taxes as well, like property and sales taxes. The tax-exempt status also lets donors to these organizations claim their contributions and gifts on their tax returns as an acceptable deduction to lower the individual's overall tax debt.

Can I deduct all donations to an approved nonprofit on my tax returns?

Some nonprofits enjoy tax exempt status, but they are structured in such a way that they do not accept donations. These organizations include chambers of commerce, trade associations, and professional football leagues. You may have to pay dues to join or buy tickets to attend these groups’ events, but such payments are not considered donations, so they can't be deducted on your tax returns. A qualifying nonprofit will accept direct donations and provide you with a tax receipt; this tells you that the gift can be deducted.

I'm thinking about starting a nonprofit. Will I still have to file tax returns?

The IRS needs to see how much money the organization has generated and how it is being used. This is typically done by filling out and submitting Form 990, a reporting return that details pertinent financial information. This also helps the IRS ensure you are following all tax laws and can maintain tax-exempt status.

What happens if my nonprofit starts a profit-making venture?

Expect to pay taxes on this aspect of the organization if it is not related to the nonprofit's overall mission. While you could technically be using the generated profits to support the nonprofit’s work, if there is no connection between the revenue-generating component and the broader work of the charity, the IRS will likely require taxes to be paid. Your tax-exempt status may also be in jeopardy. This can be a tricky area to navigate, and an accountant should be consulted for the next, best steps to take.

Whether you run a nonprofit or contribute to one, be sure you understand all tax responsibilities. An accountant can help in this process. The Callen Accounting Group, PLLC, has been serving the Mountain Home and Twin Lakes, AR, area since 1973. They offer tax return preparation, consulting, and accounting services. Call (870) 425-6066 or visit their website to schedule an appointment.