The Basics: Why is there a NonProfit Tax Status?

by on March 20, 2012

TaxMama is delighted to introduce a series of posts on Nonprofit financial management from Cindy Lauren of Lauren Associates non profit consulting. Enjoy!

Why do Nonprofits have tax exempt status?

image courtesy of taxbrackets.org

The intricacies of nonprofit finance: solicitations, donations, gifts, pledges, 990, 1099, annuities, acknowledgements, meaningful budgets and reports make this topic rich with possibilities. You’re panting, now aren’t you? There is much subject matter in the world of non profit management and a variety of opinions as well. But before delving in, it may be helpful to ask the first question: why is there such a thing as a tax-exempt status in the first place?

Tax-exemption is an acknowledgment of an organization performing an activity that relieves some burden that would otherwise fall to federal, state, or local government. The government, in fact, provides an indirect subsidy to nonprofits and receives a direct benefit in return. Nonprofits also benefit the society as a whole when they provide valuable services. The viability of some of these services would be threatened if they were subject to taxes. Tax-exemption is afforded to churches as a safeguard to preserve separation of church and state by preventing governments from using taxation to favor one religion over another.
(credit: Board Source)

Start With Your Team

TaxMama® recommends that it would be wise to work with a team of advisors to help fill in the initial application for exemption. You need someone like me to help you develop the detailed descriptions the organization’s mission, activities and fund-raising or membership plans; you need tax professional who is experienced with non-profits (or as they call them, exempt organizations) to help develop your budget and answer all the tax-related questions and make the tax-related choices (called elections) for the set-up; and YOU to envision your ideas and goals – and to make your vision come true,

Almost, almost being the operative word here, all nonprofits are exempt from:

  • state and local property taxes;
  • federal, state, and local income taxes;
  • state and local sales taxes: this is not consistent across all states, double check with yours first!

State Registrations of A NonProfit

As with registration requirements with the Attorneys General for nonprofits in each state, there are particular rules for every state regarding sales taxes. It behooves you to do the homework in advance of sales, to see if this applies for you. While enforcement may be spotty or lax, ignorance is no excuse under the law, and who wants that kind of headache? See this post on Nasty Evil Bureaucracy for additional information on this topic.

What You DO Have to Pay:

Nonprofits must pay taxes on money they make that comes from other things they do that are not directly related to their mission. They must pay payroll taxes for employees, and in many states, certain insurances are required as well.

And, as with all gifts, the tradeoff for no taxes is an increasingly detailed income tax form, the 990. Each year, especially since 9/11, this document has required more information and disclosure about income and expenses.

That is why, children, you don’t have to pay taxes on the good, important and valuable work you do. This is the IRS saying thank you.

Cindy Lauren - Lauren Associates - non profit consultingCindy Lauren is the Principal at Lauren Associates – non profit consulting

As well as advising Executives and Boards on all aspects of nonprofit management, the firm specializes in developing fundraising solutions for all sizes of organizations.

Connect with Cindy: Twitter, Linkedin, Quora

Image Credit: Analyzing your Tax Return by Images of Money on Flickr

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