Taxation for nonprofits is different from your typical business or organization. According to subsection 501(c) of the IRS tax code, these organizations are exempt from federal income taxes. As you launch your nonprofit, you will need to set up your tax planning.

What to Know About Taxation for Nonprofits 

What are the two types of 501(c) organizations?

All 501(c) organizations are divided into two categories: public charities and private foundations. A public charity must receive at least 1/3 of their income from public sources. They generally perform direct public service, like running a shelter or a food pantry.

A business or an individual typically organizes a private foundation. The benefactor funds the organization, which generates income. These generally provide grants to charities or individuals in need.

What requirements must a tax-exempt nonprofit meet?

To qualify for the federal income tax exemption, your organization must meet certain criteria. It must be launched and operated exclusively for educational, scientific, charitable, religious, literary or public safety purposes. It must also turn over the entire amount of its income.

What is the organization exempt from?

Nonprofits that meet the appropriate criteria are exempt from federal income tax. They are also exempt from some state tax, including property and sales taxes. You will be liable for employee tax, such as Medicare and Social Security. Anyone who donates to a public charity can itemize that deduction on their tax return.

Are all activities exempt?

There may be special considerations, which your accountant can help you arrange. For example, unrelated business activity will be subject to federal income tax. This means that if your organization creates income from an activity that is not related to your core purpose or mission, you will need to pay its income tax.

Donna Sellers CPA has been the trusted expert for 501(c) nonprofit organizations in Brownfield, TX, for over 20 years. This professional accounting service is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. She will answer all of your questions and handle the taxes for your new organization. Learn more on her website and call (800) 618-4914 to schedule a free consultation.