Nonprofit Status: Tax Exempt, Charities, and 501(c)(3) Organizations Explained
Nonprofit organizations with a charitable purpose are eligible for tax breaks. This exemption makes it easier for them to fulfill their altruistic mission without having to send a large check to the government every April. However, becoming eligible for nonprofit status — applying to become a 501(c)(3) organization — is more complicated than just telling the government that you’re a charity. Here’s what you need to know about tax exempt status.
Table of Contents
- 1 Nonprofit Status
- 2 Tax Exempt Status and Charities
- 3 501(c)(3) Status Organizations
- 4 Can a Nonprofit Have Its Tax Exempt Status Revoked?
Nonprofit status — which goes by the official designation of 501(c)(3) at the IRS — is an official marking given to a company by the government. It designates the company as an organization with a mission that fulfills some public good and grants them an exemption from paying income tax on any fundraising or activities related to that mission.
However, the federal government is not the only entity that tracks nonprofit status. If you want to start a nonprofit organization that receives all of the associated tax breaks, then you’ll need to apply for nonprofit status with state and local governments as well. The IRS keeps a list of all the state departments the oversee nonprofit status in their areas.
Tax Exempt Status and Charities
Tax exemptions come in a variety of forms — becoming a nonprofit isn’t the only way to secure a tax exemption.
Individual Tax Exempt Status
Individuals are eligible to qualify for a number of tax exemptions. Depending on your occupation, history of military service, or family size, you can get plenty of tax breaks on both the local and state levels. Importantly, you can also write off personal charitable donations on your taxes.
Charitable, Religious, and Educational Organizations
Organizations that perform services that fulfill a public good are often eligible for nonprofit status. Such organizations might include charities that donate food or items to the poor, education organizations that inform the public on a non-political issue, or churches, which have historically been tax-exempt in the United States.
Nonprofit Tax Exempt Status: Businesses and Other Organizations
Finally, businesses can qualify for nonprofit status as long as the services they provide are consistent with the goals of a nonprofit and any profits that they make go back into those services, and not into the pockets of owners or shareholders. If your for-profit business has a mission that could be tweaked and you can convince shareholders to divest their interests, then it may be possible to convert your small business into a nonprofit.
501(c)(3) Status Organizations
501(c)(3) is the official designation from the IRS that indicates whether or not an organization is conducting itself in a way consistent with the ideals of a nonprofit. If your organization has this status, then you will qualify for the associated tax breaks on income related to your charitable mission. There are three main requirements for an organization to qualify for 501(c)(3) status:
- The organization must have a mission consistent with the IRS’s list of exempt purposes.
- Any income that the organization makes over and above its operating costs (i.e. a profit) must be reinvested into that organization’s mission. This profit cannot be distributed to shareholders, owners, or executives within the organization.
- The organization must not attempt to influence legislation or participate in a political campaign.
If your organization currently follows these ideals or can be tweaked to do so, then it may be time to start the application for nonprofit status.
Nonprofit Without 501(c)(3) Status
501(c)(3) is the official designation for a nonprofit according to the IRS. However, if you’re unable to receive 501(c)(3) status, but you believe that your organization still fits the bill of a nonprofit, there are other ways to earn tax breaks. Businesses can apply for other tax breaks related to energy efficiency, public welfare, and general corporate responsibility.
Can a Nonprofit Have Its Tax Exempt Status Revoked?
Once an organization has received 501(c)(3) status, it must remain on its toes and manage its funds carefully. Organizations that are caught using funds for non-approved purposes or, even worse, distributing profits to shareholders and executives will have their nonprofit status revoked. In order to ensure that your organization keeps its tax exempt status, you should assemble a skilled board of directors to oversee operations and ensure that the organization operates within legal boundaries.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated February 28, 2019. It was originally published February 28, 2018.