Non-Profit isn’t synonymous with Tax-Exempt

A non-profit corporation is a corporation in which no part of the income is distributable to its members, directors, or officers.  To create a non-profit corporation, an entity simply files a Certificate of Formation with the Texas Secretary of State along with the appropriate filing fee (currently $25).  A non-profit corporation may be created for any lawful purpose, but must contain certain statutory language if tax-exempt recognition is sought.  So remember, not all non-profit corporations are entitled to exemption from state or federal taxes.

The most sought-after non-profit is a public charity, whose goal is to raise money for its specific beneficiary, rather than its owners.  Public charities may be recognized as tax-exempt if they meet the requirements of Internal Revenue Code § 501(c)(3).

Section 501(c)(3) of the Internal Revenue Code exempts from taxation, with a few exceptions, organizations created exclusively for the following exempt purposes:

  • charitable,
  • religious,
  • educational,
  • scientific,
  • literary,
  • testing for public safety,
  • fostering national or international amateur sports competition, and
  • preventing cruelty to children or animals.

“Charitable” is given its generally accepted legal meaning, which includes:

  • relief of the poor, the distressed, or the underprivileged;
  • advancement of religion;
  • advancement of education or science;
  • erecting or maintaining public buildings, monuments, or works;
  • lessening the burdens of government;
  • lessening neighborhood tensions;
  • eliminating prejudice and discrimination;
  • defending human and civil rights secured by law; and
  • combating community deterioration and juvenile delinquency.

There are 29 different types of exempt organizations.  Thus, merely because an organization is a non-profit, do not assume that it is tax-exempt, or more specifically, a 501(c)(3) tax-exempt non-profit, or more specifically a public charity.

In order for the IRS to recognize a non-profit organization as tax-exempt, typically within 27 months of formation, the organization must apply for recognition by filing either a form 1023 or 1024 application and the appropriate filing fee (currently $400/850).  Once received, the application is assigned to a specialist, who evaluates the application and approves it, asks for minimal / specific additional information, or asks for more development and works with the organization to determine if approval is possible.  Check out the IRS’ Charities & Non-Profits website (https://www.irs.gov/Charities-&-Non-Profits) for more details.

 

This answer is provided in the spirit of public education and not as legal advice. If you require legal advice for a particular situation, you should consult an attorney.

 

Categories : Non-Profit Law


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