When someone is presented with the term “non-profit”, there is an automatic assumption that a non-profit equals charity, and by default tax exempt. Nothing can be further from the truth. We provide a top level discussion next.

A non-profit organization is just like a regular corporation in that it is allowed to generate profit in its primary mission. Unless the non-profit elects to be tax exempt, all profits are generally taxed.

Non-profit organizations can seek to be exempt from paying federal and state incometaxes if they belong to one of the twenty nine 501(c) organizations. Most people are familiar withthe 501(c)(3) charitable organizations such as the United Way or the Red Cross. When one makes adonation to a 501(c)(3) organization, you are normally issued a tax receipt for the donation that goes to reducing your taxable income.

While there are some exceptions, most organizations must apply and receive IRS approval to be exempt. The type of filing is normally tied to the activity of the organization and would require analysis. Should you need this type of assistance, please feel free to contact our office. The time frame is normally 2-4 weeks for simple applications, and 9 months to a year for more complex organizations.

Maintaining the Tax Exempt Status
Once the tax exemption is received, the non-profi t is required to fi le a Form 990 or 990EZto the IRS as a part of maintaining the status. Thresholds for which form to use is dependent uponthe donations received and the type of 501(c) organization (charity, veterans organization, church,etc.) but the reporting is generally not overly onerous. The purpose of the return is to ensure that the tax-exempt non-profit is still engaged in its specifi c activity and has complied with the law to maintain its exemption.

What Happens if the Tax Returns Are Not Filed?
If the tax-exempt organization fails to file a tax return three years in a row, the IRS will automatically remove the tax exemption status until compliance is achieved. This potentially means that any fundraising could be subject to taxation as income. Non-profits failing to comply are also charged a penalty of $20 per day up to a maximum of $10,500. If the organization has annual gross receipts above $1,067,000.00 then the penalty rises to $105 per day to a maximum of $53,000.00.

If the organization does not file a complete return or furnish correct information, a letter is normally sent out to the organization seeking further information. If the organization fails torespond, a penalty is then issued to the person failing to comply at a penalty of $10 per day up to amaximum of $5,000.00. There are also additional penalties for willfully not filing returns, filing afraudulent return, or giving the IRS fraudulent statements.

Non-Profits Still Subject to Other Taxes
It is a common misconception that non-profits are exempt from ALL TAXES. They are only exempt from federal and state income taxes. They are still obliged to pay sales and use tax just like every other consumer or business entity.

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