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Tax Concerns When Your Nonprofit Corporation Earns Money

501 c3

In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. The IRS requires you to include specific language in your articles of incorporation for those intending to apply for federal tax-exempt status. While organizations that meet the requirements of Section 501(c)(3) are exempt from federal income tax, they are required to withhold federal income tax from their employees’ paychecks and pay Social Security and Medicare taxes. There are several types of nonprofit organizations that are tax-exempt. The issue advocates overlook in the debate over the charitable deduction is how little nonprofits receive in charitable contributions compared to how dependent they are on program service revenues.

Advocates claim TCJA’s near doubling of the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. The increased value of the standard deduction dramatically reduced the number of taxpayers who needed to itemize their deductions, from 38 million in 2017 to 15 million in 2018, a 60 percent decline.

About Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)( of the Internal Revenue Code

Starting a 501(c)(3) nonprofit helps organizations by allowing them to solicit tax-exempt funds legally from donors. Section 501(c)(3) is the portion of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations, specifically those that are considered public charities, private foundations or private operating foundations. It is regulated and administered by the US Department of Treasury through the Internal Revenue Service. There are other 501(c) organizations, indicated by categories 501(c)(1) – 501(c)(29). To apply for tax-exempt status under Section 501(c)(3), most nonprofit organizations are required to file Form 1023 or Form 1023-EZ within 27 months from their date of incorporation. The charitable organization must include its articles of incorporation and provide documents that prove that the organization is only operating for exempt purposes.

Program service revenues encompass a spectrum of income sources, including tuition, payments for medical expenses, payments from Medicare and Medicaid, ticket sales, broadcast rights, conference fees, and government contracts. Nearly all such revenue is exempt from federal income taxes for nonprofits. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. It’s important to remember that the nonprofit is fundamentally a corporation, trust, LLC or unincorporated association and must follow the organizational rules of the underlying business entity.


The Urban Institute’s dataset also identifies a number of large organizations (some with incomes over $1 billion) that provide consulting, research, and analysis for the government and for-profit companies. This income also escapes tax because the payments for service by the companies are deductible as a business expense and not taxed at the organization level. Properties owned by charitable nonprofits used for a tax-exempt purpose are exempt from property taxes under state law.

501 c3

A 501(c)(3) and 501(c)(4) are both tax-exempt organizations and do not have to pay taxes on the money donated to the organization, but only the donations provided to a 501(c)(3) are tax write-off for the donors. Donating to a 501(C)(4) organization does not allow the donor to write-off the donation — except for a Nonprofit Bookkeeper vs Accountant Who Should You Hire? few limited types of organizations, such as fire or rescue or certain types of veterans’ organizations, as described in the IRS code. A 501(c)(3) must also provide the donor with a receipt for the amount of the donation or a receipt for the value of the donation, while the 501(c)(4) does not have to do the same.

Business Licenses

These are activities that generate revenues but aren’t directly related to fundraising efforts and include things like renting out office space or selling merchandise. Organizations that qualify for tax exemption under section 501(c)(3) must not serve any private interests, including those of the creator, the creator’s family, shareholders, other designated individuals, or others controlled by private interests. Donations to public charities can be tax deductible to the individual donor up to 60% of the donor’s income2,3. In addition, public charities must maintain a governing body that is mostly made up of independent, unrelated individuals4. In order to remain a public charity (and not a private foundation), a 501(c)(3) must obtain at least 1/3 of its donated revenue from a fairly broad base of public support.

As tax-exempt entities, both 501(c)(3) and 501(c)(4) organizations are not allowed to participate or intervene in any political activity, such as promoting a candidate or opposing a candidate. The difference is that a 501(c)(3) organization loses it rights to be a tax-exempt even if the organization indirectly participates in a political activity. A 501(c)(4) has a way to get an exception to the political activity regulation. The 501(c)(4) must provide proof to the IRS that it works exclusively for the betterment of the community or is concentrated on the social welfare of the community. Then and only then can the organization get an exemption from the IRS to participate in a political activity, such as promoting or opposing a candidate or publishing political information in organization newsletters or via other communications channels.

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