Non-profit organizations are commonly founded to raise awareness and funds for particular causes. As a result, taxes may be an afterthought for passionate people who set up these groups. However, it’s essential to understand rules and procedures applicable to financial accounting and taxes to ensure you can continue operating for years to come.

A Guide to Non-Profit Taxes

Are non-profits, 501(c)(3)s, and tax-exempt organizations all the same?

These terms are often used to describe the same organizations, but they’re each different. A non-profit is an organization that’s been established for a purpose that doesn’t involve making money, while a 501(c)(3) is a non-profit that’s recognized by the Internal Revenue Service (IRS) as being tax-exempt because of its charitable activities. Tax-exemption refers to the outcome of an organization being designated for a charitable purpose by the IRS.

What are the tax benefits of being a 501(c)(3) organization?

The IRS puts charities in a class of their own because they understand that a charity’s financial activities don’t involve making a profit. 501(c)(3) organizations are exempt from paying state and federal corporate income taxes, may be exempt from property taxes depending on the state, and often have higher limits for state or federal unemployment tax liabilities.

If you have a charity, speak with an accountant to understand the financial accounting principles related to your organization. Consulting with a professional will help you avoid any issues once tax time hits.

What do you have to do to achieve 501(c)(3) status?

To be considered for this status, you’ll need to prepare an IRS Form 1023. This is a 29-page document where you’ll detail the structure, hierarchy, and programs associated with the charity. You’ll be required to disclose certain aspects of your financial accounting activities in this form, and the IRS often requires additional documentation before it grants 501(c)(3) status. There’s also a 1023-EZ form for small, low-budget charity operations.

How long will it take for the IRS to grant your tax-exempt status?

It generally takes between two to 12 months for the IRS to process Form 1023 applications. This is due to the back-and-forth correspondence that’s common during the process as the IRS requests additional documentation. Agents also have to thoroughly review your Form 1023 before it’s approved, which can take weeks or months, depending on their workload. If your charity was created for immediate disaster relief, it might be possible to expedite this process.

If you need accounting help for your non-profit, get in touch with the professionals at Tostrud & Temp in La Crosse, WI. For more than 35 years, this accounting firm has helped local businesses and individuals with a variety of accounting and tax needs. Their knowledgeable staff can help you manage financial activities so you can focus on growing and managing your business or charity. Visit their website to learn more about their services or schedule a consultation at (608) 784-8060.