Nonprofit Corporation

When it comes to your business structure, have you thought aboutorganizing your venture as a nonprofit corporation? Unlike afor-profit business, a nonprofit may be eligible for certainbenefits, such as sales, property and income tax exemptions at thestate level. The IRS points out that while most federal tax-exemptorganizations are nonprofit organizations, organizing as anonprofit at the state level doesn’t automatically grant you anexemption from federal income tax.

Another major difference between a profit and nonprofit businessdeals with the treatment of the profits. With a for-profitbusiness, the owners and shareholders generally receive theprofits. With a nonprofit, any money that’s left after theorganization has paid its bills is put back into the organization.Some types of nonprofits can receive contributions that are taxdeductible to the individual who contributes to the organization.Keep in mind that nonprofits are organized to provide some benefitto the public.

Nonprofits are incorporated under the laws of the state in whichthey are established. To receive federal tax-exempt status, theorganization must apply with the IRS. Two applications arerequired. First, you must request an Employer Identification Number(EIN) and then apply for recognition of exemption by filing Form1023 (Charitable Organizations) or 1024 (Other Tax-ExemptOrganizations), with the necessary filing fee.

The IRS identifies the different types of nonprofitorganizations by the tax code by which they qualify for exemptstatus. One of the most common forms is 501(c)(3), which is set upto do charitable, educational, scientific, religious and literarywork. This includes a wide range of organizations, from continuingeducation centers to outpatient clinics and hospitals.

The IRS also mandates that there are certain activitiestax-exempt organizations can’t engage in if they want to keep theirexempt status. For example, a section 50l(c)(3) organization cannotintervene in political campaigns.

Remember, nonprofits still have to pay employment taxes, but insome states they may be exempt from paying sales tax. Check withyour state to make sure you understand how nonprofit status istreated in your area. In addition, nonprofits may be hit withunrelated business income tax. This is regular income from a tradeor business that is not substantially related to the charitablepurpose. An exempt organization with $1,000 or more of gross incomefrom an unrelated business must file Form 990-T and pay tax on theincome.

If your nonprofit has revenues of more than $25,000 a year, youmust file an annual report (Form 990) with the IRS. Form 990-EZ isa shortened version of 990 and is designed for use by small exemptorganizations with total assets at the end of the year of less than$25,000. Form 990 asks you to provide information on theorganization’s income, expenses and staff salaries that exceed$50,000. You also may have to comply with a similar staterequirement.

For more information on IRS tax-exempt status, download IRSPublication 557 (Types of Tax-Exempt Organizations) at the IRS website.