Posted by Karen Munoz, EA

Tax-Exempt Organization: Requirement for Tax Exemption

Tax-Exempt Organization: Requirement for Tax Exemption

IRC Code, Section 501(c) sheds light explicitly on the critical requirement for a tax-exempt organization. 

In applying for tax exemptions, firms need first to apply to be recognized for exemption. The result of this is a formal recognition of the status of the firm by Uncle Sam. Generally, firms that are not profit-oriented and provide valuable service to the community are eligible. 

What is the Qualification for tax exemption? 

The tax exemption has to do with the income and transactions that you don't have to pay taxes on – federal, state, and local. A handful of taxpayers merit personal exemptions that bring down their tax bill, similar to what is available from a deduction. Also, both state and federal governments exempt some organizations from taxes due to public service like charitable and religious firms. 

Here are some qualifications for tax exemption from nonprofit organizations. With this status, the firm can write off their contribution on their separate tax return. 

Uncle Sam only allows some charitable organizations to apply for tax exemption with Section 501(c)(3), and they can receive tax-deductible contributions based on code section 170. 

  • An organization must be operated solely for the exempt purpose to qualify for the tax-exempt.

  • The firm must be established based on charity, be a religious firm, be considered a scientific group, or qualify as an educational institution.

  • The earnings should not have to do with a private shareholder or a single individual. 

  • The organization cannot have any political affiliation. As a result, it has no business with political campaigns or legislation. 

Some schools, labor firms, social welfare organizations, colleges, veterans' associations, some social clubs, and firms in charge of scientific research can merit tax exemption if they meet Uncle Sam's tax-exempt requirement.

Nonprofits from 501(c)(3) can either be a private foundation or the government or public charities that enable them to derive a significant share of their income from the general public. 

Private foundations can be non-operating and operating. Non-operating foundations use their revenue as grants to similar nonprofits; the operating foundation conducts its program, which meets a series of charitable goals. 

An organization's tax-exempt status allows people to be aware of the organization's financial contribution to the firm that can be deducted. Such firms can receive grants from a private firm and be secured should there be any court case. 

Income Tax: is anyone Exempt?

Organizations are not the only ones who enjoy tax-exempt status, as some firms that meet specific criteria are exempted. 

People with income below or the same as the standard deduction will not pay tax. For instance, for someone under 65 with an income below $12,000 in a year and you are single, there is no need to file a tax return. (Although, you might file it to be on the safe side).

Also, there is some form of income in which recipients do not have to pay taxes. Social security and benefits from welfare fall into this category. Proceeds from life insurance and family allotments for the Armed forces also fall to the same category. 

From the 2018 tax year, taxpayers should note that there is no provision to use-dependent and personal exemption. 

How to Apply for Tax Exemption 

When it is approved, firms alongside other nonprofits can apply for tax exemption by filing Form 1023 within 27 months after incorporations. With this, the nonprofit can be acknowledged as a tax-exempt organization from when it was created. The nonprofit organization that is not big should file form 1023-EZ.

All firms that are after the tax-exempt status need to have an EIN (Employer Identification Number). An organization without EIN can file Form SS-4 to get one. 

When the form is electronically filed and the fees paid, then comes the waiting period for approval. The accuracy of the document submitted determines the waiting period, as it typically takes between one month and a year.

There might be a couple of legal and taxation issues alongside the requirement to qualify for tax exemption. As a result, one needs to consult an experienced tax expert that can guide the process and ensure that you meet all vital requirements for tax exemption. 



Karen Munoz, EA
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