NonProfit Organizations Tax and Accounting

On the subject of nonprofit organizations tax and accounting, it’s fair to say that there is a fair deal of uncertainty and misinformation out there. It seems as if you can speak to one person and be told one thing, only to then speak to somebody else and be told something completely different. As far as the law goes, the IRS must be obeyed. Get onto the wrong side of the taxman and the consequences could be extremely severe. In fact, in some instances you could wind up losing your business, your home, your savings, and even your freedom. So where does that leave nonprofit organizations? Well, that’s where we come into the picture. There are 29 unique forms of nonprofits within the federal tax code, and not every single one of them is tax-exempt. To help shed some light on the situation and bring more transparency to the table, here’s a look at everything you need to know with regards to nonprofit organizations tax and accounting.

What is a Nonprofit Organization?

We’ll get the ball rolling today by looking at what a non-profit, tax-exempt organization actually is. To cut to the chase, a nonprofit organization is a business which has been granted tax exemption via the Internal Revenue Service, better known as the IRS. Now, any donations which are made to said organization are actually tax deductible to the business or the individual that happened to make the donations. It is however, down to the nonprofit organization in question, to ensure that their operating info, and their financial info, is made public. This is to ensure that those that donated can clearly see how their contributions have been utilized by the organization, and that hopefully they have been put to good use. These organizations will pay no income tax on any donations made to them, nor on any finances earned via charitable and fundraising activities. Some Nonprofits may be referred to as NPOs, or 501(c)(3) organizations, due to the specific section of the tax code which grants them permission to operate.

So, does this mean that NPOs are above the law and are untouchable when it comes to taxes, accounting, and the IRS in general? Well, the answer to that question is no. Virtually nobody is above the law when it comes to the IRS and taxes, and there are still a number of rules and laws which NPOs must adhere to and abide by, if they wish to continue operating as they are. NPOs need to account for all activity, their finances, books, and accounts must be in order, and they must continue to abide by these rules if they wish to keep their NPO, tax-exempt status and stay on the IRS’ good side.

We assist nonprofits and tax exempt organizations with various tax matters, 877-788-2937.

What Exactly Does It Mean to be Granted Tax Exempt Status?

To many of you reading this, being granted tax exempt status may sound like a dream come true. If your organization is granted tax exempt status, this basically means that you will be exempt from most forms of federal taxes and some forms of state taxes, such as property taxes or sales perhaps. it isn’t just the organizations that are fortunate enough to benefit however. It also turns out that some donors may also be able to benefit from a tax deduction from any donations made to NPOs.

So, are all 501(c)(3) Actions and Activities Tax Exempt?

In a word – no. While NPOs get many breaks when it comes to taxes, some activities carried out by the company in question could still be taxed. More often than not, these activities are classed as unrelated business activities. So, as an example, if the NPO was to run a specific business venture in a bid to supplement its own income, if the business venture was not directly related to the NPO’s core mission, they would pay taxes on these earnings. In terms of individual charitable donations, people can only take a tax deduction from their donations, when they have donated to a charity and have itemized each deduction on their tax return. This is where it pays to have a great enrolled agent, CPA, tax lawyer and tax expert on your side, as they will be able to break everything down for you nice and simply.

When it comes to earning tax exemption from the IRS, this status is not automatically granted. Charitable organizations must approach the IRS and request 501(c)(3) status. This is why many smaller organizations or temporary ones choose not to apply. Even though they are a charitable organization, they may only intend to operate for a limited period of time, and so basically they don’t think it is worth their time. Others choose to be known as ‘unincorporated nonprofit organizations, which are not the same as they don’t qualify for tax exemption. Faith-based nonprofits, churches, and religious organizations are also treated in a different, more unique way than public charities. Put simply, nothing in the world of NPOs, taxes, and the IRS is simple or straightforward, which is again another reason to consider bringing in an enrolled agent, CPA, tax lawyer or tax professionals.

Misconceptions About Nonprofits Taxes and Accounts

Like virtually everything else in life, there is a certain degree of confusion and misconception when it comes to NPOs and taxes. A large percentage of the population for example, seem to work under the assumption that if a non profit organization was to make money and earn a profit, they would be committing fraud and would be breaking the law. This is not the case at all. After all, even though they are a charity, they still need to earn a living and keep funds coming in to keep them going. In reality, NPOs are free to operate in precisely the same way that a non-tax-exempt organization would operate, and yes, that includes turning over a profit. The law is basically created to provide all of the advantages associated with a free market system, with the added bonus of tax incentives for any corporations or individuals that may choose to donate and contribute charitably to the efforts of the NPO in question. There are however, certain stipulations in place which concern the distribution of the profits that must be met in order for an organization to claim tax exempt status. For example:

  1. The organization in question must be operated exclusively for any one, or more, of the following purposes:
    • Religious purposes
    • Educational purposes
    • Scientific purposes
    • Literary purposes
    • Charitable purposes
    • To prevent cruelty to living beings
    • To encourage the participation in amateur sports
    • To reduce the burdens of the government
    • To improve local areas and points of interest
    • To maintain public confidence within the legal system
  2. On top of that, any net earnings made by the organization may NOT be distributed for the private benefit of individuals, under any circumstances. The IRS is particularly clear on that one.
  3. The NPO in question must ensure that it does not engage either directly or indirectly, in any political campaigns.
  4. Finally, the organization in question must not spend what is classed as an excessive duration of time, on efforts which influence legislation. A lot of people work under the assumption that NPOs cannot engage in any legislative activities at all, but that’s not the case.

We assist nonprofits and tax exempt organizations with various tax matters, 877-788-2937.

Interesting Facts About Nonprofits That You May not Have Known

Before you consult your enrolled agent, CPA, tax lawyer, get back to your accounts, and ensure that you’re compliant with rules laid out by the IRS, we’ll finish off by giving you a look at a few interesting facts about non-profit organizations that you may not have been aware of. Take a look, we think you’ll be pleasantly surprised.

There are literally millions of nonprofit organizations out there – If you thought that nonprofit organizations were few and far between, you may wish to think again. There literally millions upon millions of nonprofit organizations in the United States. Now, officially, if you search online it will tell you that there are 1.5 Million nonprofits registered in the US. However, as some institutes do not actually need to apply for exemption status, this number is even higher. Public schools and churches for example, do not need to apply. Therefore, the number of nonprofits in the US is thought to be closer to 3 Million.

Not every nonprofit organization is tax exempt – As you have probably guessed by now, not every single nonprofit organization in the USA is tax exempt. As designated by each state, a nonprofit organization will place its income back into its budget. This means that dividends must NOT be distributed between shareholders, officers, and board members. Some institutes are automatically granted tax exemption, like we just looked at. For the most part however, these organizations must apply for tax-exempt status

These organizations play important roles in the economy – Some pessimistic individuals out there will view nonprofit organizations as ways of getting around paying taxes to the IRS. The truth however, is that many of these charities play key roles in the United States’ economy. Each year, charity-giving in the US sits at around $300 and 400 Billion! In fact, charity giving makes up around 5% of the country’s gross domestic product, adding hundreds of billions of dollars to the economy each year.

The majority of nonprofit organizations are small – Now, sticking with the official 1.5 million NPOs, only 10% of these organizations actually bring in $500,000 or more with annual revenue, and only 14% actually have that much in assets. Therefore, on paper at least, the majority of nonprofit organizations out there are actually pretty small.

Not every NPO can accept tax deductible contributions – This is where it gets a little confusing. You see, not every NPO can accept tax deductible contributions. Despite this however, it is only tax-exempt organizations which are able to receive tax-deductible contributions. Told you it was confusing. Basically, there are 30 different types of exemption, and of these 30, only some are eligible to accept contributions which are tax deductible. Typically it’s mainly private foundations and 501(c)(3) public charities which are able to accept contributions which are tax deductible. Yeah, our heads hurt after reading that too, which is yet another reason to consider hiring professional tax services such as an enrolled agent, CPA, tax lawyer, to help you get your head around everything.

Big charities hold the most public assets – Okay, this one shouldn’t come as quite as much of a surprise. As of July 2015, it is actually large charities which hold the most public assets. Large charities made up just 10% of all charities, yet they held a whopping 87% of assets. While official stats are not yet out, we can say with confidence that that is unlikely to have changed a great deal.

So, there you have it. Hopefully we’ve now been able to open your eyes and enlighten you on all things tax-related when it comes to operating as a nonprofit organization. The info above barely scratches the surface if we’re being honest, but it does cover the basics. If you wish to find out more about nonprofit organizations tax and accounting, it is always best to consult the experts and see what they have to say on the matter. A, enrolled agent, CPA, tax lawyer could prove to be one of the best investments you will ever make, so be sure to head online and find your nearest expert today.

We assist nonprofits and tax exempt organizations with various tax matters, 877-788-2937.

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