Tax Law for a Non-Profit Organization

For many organizations, deciphering how the tax code applies to their business practices can be daunting. This effort can be even more complicated for non-profit charitable agencies, whether or not they have revenues that exceed their expenditures. First, the organization must qualify for tax-exempt status from the Internal Revenue Service (IRS). While some groups, such as churches and small community groups, automatically qualify for tax-exempt status, others must follow strict guidelines and complete a thorough application process.

A non-profit organization that receives an exemption from the IRS on paying annual federal income taxes is considered "tax-exempt." Nonprofit agencies must have a mission that consists of "charitable, religious, educational, scientific, or literary" efforts in order to earn tax-exempt status. The 30-page application can take several days to complete and up to six months to be approved. While the IRS is processing the application, the organization works under a "tax-exemption pending" status.

Read More: How to Find 501(C)(3) Tax Exempt Companies

The most common type of nonprofit group is known as a "501(c)(3)" corporation. Subsection 501(c)(3) of the Internal Revenue Code outlines the qualifications for a charitable agency to receive tax-exempt status. Many groups with religious, educational or cultural missions qualify for 501(c)(3) status. Other non-profit groups, such as youth sports leagues or political action organizations, can qualify for tax-exempt status under a different subsection. Donors to a 501(c)(3) group can also deduct their donations from their personal or business income taxes.

Just because a group receives an exemption from paying taxes does not mean that the organizers are exempt from filling out tax forms. Non-profit groups that bring in more than $50,000 in annual revenue must complete a Form 990. The form details the group's revenues, expenses, programs and purposes. Agencies that make less than $50,000 can submit an "e-postcard," a short summary of the group's revenues. Agencies can submit these forms either by mail or via electronic filing.

The income that a non-profit organization generates to achieve its mission is considered tax-exempt. However, any income over $1,000 not related to the group's activities is classified as taxable. If a group has excessive income unrelated to its declared objective, the IRS can potentially revoke its tax-exempt status. For instance, if the group sells donated items at a fundraiser, that income is tax-exempt. If the group buys items for resale, the profit from those sales is considered "unrelated" and taxable.

The IRS places strict rules on non-profit organizations seeking tax-exempt status. Groups that seek to use tax-exempt status in order to avoid paying taxes may be subject to audits from the IRS, state authorities and other government offices. Agencies that fail to follow the IRS guidelines may lose their tax-exempt status and face civil suits, criminal charges and ruined reputations.