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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

Not-For-Profit Taxes: Understanding the Basis

Not-For-Profit Taxes: Understanding the Basis

There are not-for-profit organizations that do not earn a dime from their activities. The money made in the organization is used to keep the company's day-to-day operation instead of paying income to its members, directors, or officers. Generally, nonprofit organizations are exempted from taxes such as charities. These organizations are not mandated to pay taxes. These not-for-profit organizations include American Red Cross, the United Way, and The Salvation Army. 

There are also not-for-profit organizations known as nonstock corporations, such as clubs, rescue squads, and religious organizations. Not-for-profit organizations do not pay taxes; on the contrary, some nonprofit organizations pay taxes even with tax-exempt status. Organizations with tax-exempt status are not mandated to pay federal tax on association income. These companies use the money to further their mission and programs. 

Not for Profit and Taxes

The IRS only recognizes organizations that take the 501(c)(3) in tax-exempt status. However, there are guidelines to qualify for the status. The organization should be created for the following purpose or purposes, such as:

  • Charity

  • Education

  • Scientific

  • Literary

  • Fostering national or international amateur sport competition

  • Preventing children or animal cruelty

  • Religious 

In addition, not-for-profit organizations can decide to incorporate by registering and running to maintain compliance with the authorized state agency responsible for regulating such activities. Many not-for-profit organizations are included in the tax-exempt status, hindering them from paying any form of taxation, including sales and property tax. 

However, the IRS may request taxes on donations made on 501(c)(3). For example, a church may be classified as a not-for-profit organization not to pay property taxes on its worship center. In addition, if a not-for-profit organization takes donations in kind and converts it to money, the organization is not expected to pay taxes on the building or whatever they use it for. However, the IRS expects these not-for-profit organizations to remit payroll taxes to cover their employees. In addition, as a member or director in these organizations, you must file income taxes to the IRS.

Common Problems That Not-for-Profits Encounter

According to Nonprofit Research Collaborative stated in 2019:

  • Most not-for-profit organizations in the US and Canada face staffing problems. The problem resulted in over 18% of their managerial issues and a low number of staff. However, these organizations pay high staff salaries. 

  • Another common problem resulting in 11% is in donors such as cultivation, retention, communication, and acquisition. 

  • The third common problem rounding up to 10% is the economy of the country or state. In addition, they are also affected by the concomitant national mood and tax reform laws.

  • Another issue involving leadership, fundraising, and budgeting amounts to 9% of their problem. 

  • Not-for-profit organizations also face mission or purpose problems and trying to create programs to retain their purpose amount to 8%

Additional concerns include changing demographics, starting and ending campaigns, and government funding. Another issue not listed in the survey is founder's syndrome, as stated by the Maine Association of Nonprofits. This problem occurs when the founder decides to make changes to maintain the upkeep of the organization or group. At the start of the organization, the founder may have like-minded people with the same idea. But as time passes, the board may change, and different views may start flowing in to improve the group on what to do and how to do it may rise. In the case the founder insists on maintaining the organization's growth and change, the situation is known as founder's syndrome. Since the board is tasked with running the organization, the condition may cause problems that lead to difficult steps like voting to replace the founder. 



Jim McClaflin, EA, NTPI Fellow, CTRC
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