Definition: A business organization that serves some public purpose and
therefore enjoys special treatment under the law. Nonprofit
corporations, contrary to their name, can make a profit but can't
be designed primarily for profit-making.
When it comes to your business structure, have you thought about
organizing your venture as a nonprofit corporation? Unlike a
for-profit business, a nonprofit may be eligible for certain
benefits, such as sales, property and income tax exemptions at the
state level. The IRS points out that while most federal tax-exempt
organizations are nonprofit organizations, organizing as a
nonprofit at the state level doesn't automatically grant you an
exemption from federal income tax.
Another major difference between a profit and nonprofit business
deals with the treatment of the profits. With a for-profit
business, the owners and shareholders generally receive the
profits. With a nonprofit, any money that's left after the
organization has paid its bills is put back into the organization.
Some types of nonprofits can receive contributions that are tax
deductible to the individual who contributes to the organization.
Keep in mind that nonprofits are organized to provide some benefit
to the public.
Nonprofits are incorporated under the laws of the state in which
they are established. To receive federal tax-exempt status, the
organization must apply with the IRS. Two applications are
required. First, you must request an Employer Identification Number
(EIN) and then apply for recognition of exemption by filing Form
1023 (Charitable Organizations) or 1024 (Other Tax-Exempt
Organizations), with the necessary filing fee.
The IRS identifies the different types of nonprofit
organizations by the tax code by which they qualify for exempt
status. One of the most common forms is 501(c)(3), which is set up
to do charitable, educational, scientific, religious and literary
work. This includes a wide range of organizations, from continuing
education centers to outpatient clinics and hospitals.
The IRS also mandates that there are certain activities
tax-exempt organizations can't engage in if they want to keep their
exempt status. For example, a section 50l(c)(3) organization cannot
intervene in political campaigns.
Remember, nonprofits still have to pay employment taxes, but in
some states they may be exempt from paying sales tax. Check with
your state to make sure you understand how nonprofit status is
treated in your area. In addition, nonprofits may be hit with
unrelated business income tax. This is regular income from a trade
or business that is not substantially related to the charitable
purpose. An exempt organization with $1,000 or more of gross income
from an unrelated business must file Form 990-T and pay tax on the
income.
If your nonprofit has revenues of more than $25,000 a year, you
must file an annual report (Form 990) with the IRS. Form 990-EZ is
a shortened version of 990 and is designed for use by small exempt
organizations with total assets at the end of the year of less than
$25,000. Form 990 asks you to provide information on the
organization's income, expenses and staff salaries that exceed
$50,000. You also may have to comply with a similar state
requirement.
For more information on IRS tax-exempt status, download IRS
Publication 557 (Types of Tax-Exempt Organizations) at the IRS website.