If you’re unsure of exactly how nonprofit organizations work, the following information, based on 2005 nonprofit federal tax law should help you understand how nonprofits work. Being a nonprofit organization has many tax implications, and it’s important to understand the 2005 nonprofit federal tax law before you attempt to set up a nonprofit organization.
According to 2005 nonprofit federal tax law, and the years before and after 2005, a non profit organization is one that is a “group organized for purposes other than generating profit and in which no part of the organization’s income is distributed to its members, directors, or officers”.* Non-profit corporations are often termed “non-stock corporations.
Non-profit organizations must be designated as nonprofit when they are created. They may only pursue purposes designated by statutes for non-profit organizations. In general, non-profit organizations include churches, public schools, public charities, public clinics and hospitals, political organizations, legal aid societies, volunteer services organizations, labor unions, professional associations, research institutes, museums, and some governmental agencies.
According to 2005 nonprofit federal tax law, an organization is exempt from federal taxation if it is organized and operated exclusively for religious, charitable, scientific, public safety, literary, educational, prevention of cruelty to children or animals, and/or to develop national or international sports. When a non-profit organization is set up, they are also exempt from Social security tax. However, 80% of nonprofit organizations choose to pay social security tax because participation in the social security tax is a benefit to the employees of these nonprofit agencies.
According to 2005 nonprofit federal tax law, in order to qualify as a non-profit tax exempt entity, you must apply to the IRS for what is known as 501c3 status. When you receive 501c3 status, not only are your organization exempt from paying federal taxes, but you can receive tax deductible contributions. This means that when people donate money to your organization, they can deduct this donation from their taxes. Just because your organization is exempt from paying taxes, however, does not imply that they are exempt from federal record keeping.
One of the most important aspects of record keeping is your financial books. You must keep record of all support including donations, grants, sponsorships and other revenue. In addition, though you aren’t required to file a federal tax return with the IRS, you may be required to file an annual information return, with pertinent information about your organization. Setting up a non profit organization can be a great way to avoid taxes when you’re doing charitable work. But, it’s wise to take a further look at the IRS laws and ensure that your organization stays within the confines of the tax laws.