What is a Nonprofit Organization?

An organization or group that uses money to achieve goals other than profit is considered a nonprofit organization in the United States. This designation gives an entity a unique status within the IRS, these companies fall under the U.S. Internal Revenue Code Section 501(c).

There are many nonprofit organizations worldwide, but in the United States they are formed with articles of incorporation in their state of primary operation (for help starting a new mexico nonprofit, be sure to contact one of our nonprofit experts). Once incorporated, the legal entity that is created is subject to treatment as a corporation and must follow all the procedures that a normal business would; this includes ongoing reporting in addition to adhering the operate guidelines that come through the entity’s bylaws.

Form 1023One of the advantages that many nonprofit organizations take advantage of is the tax exempt status for income tax. There is a general misconception that all nonprofit entities are tax exempt, however nonprofit organizations must first apply to the IRS to qualify as a tax exempt organization. This application is made using IRS Form 1023, feel free to contact one of our lawyers for help completing form 1023. After determining whether an organization should be considered tax exempt, the IRS will offer an authorization letter that can be used for income taxes, filing taxes, and deducting certain expenditures and donations. Even though the taxes are often believed to be universal, it does not apply to other federal employment taxes among others. Also, if a company has income that is not related to their purpose, then they will also be subject to federal income tax (this happens when the organization is making unrelated business income).

Many local communities offer exemptions from taxes to local nonprofit organizations (such as sales and property tax). However, this is not always guaranteed for nonprofit organizations. Federal exempt nonprofits may still be required to pay state and local taxes depending on the location. There are additional application processes for many of the local tax exemptions. Either way, a nonprofit organization that is tax exempt will be required to file financial statements at the state level and to federal authorities. The Form 990/990EZ must be filled out by all nonprofits and are made available for public scrutiny within these guidelines.

Many nonprofit organizations are often called a 501(c) and are tax exempt organizations in the United States. They abide by the section 501(c) of the Internal Revenue Code (26 U.S.C.§ 501(c)), which allows twenty eight different types of organizations to become exempt from federal taxes. The sections 503 – 505 detail requirements for acquiring the tax exemptions. Nonetheless, most states within the United States use Section 501(c) for definitions of state and local tax exemptions as well. Contact one of our experts to form a 501(c) for your charitable cause.

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