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The 501(c)3 Organization

Taxation

I have had many clients come to me to ask how they could start a non-profit organization.  The main purpose of starting a nonprofit is to gain the contribution advantage the Internal Revenue Service (IRS) provides.  Why do you need the IRS to authorize this? What is the difference between tax exempt and a charitable organization?  How does the church fit into all of this?  So what does this all mean?

There are several issues you need to understand before proceeding.  They include the following:

  •       Nonprofit Status
  •       Tax Exempt Status
  •       Charitable Organizations
  •       Other Non-Profits

Nonprofit status is a state issue.  In my state they use the term, non-stock status.  This means that the organization or entity is being formed as a legal entity to separate it from an individual(s).  This grants the entity the right to conduct business operations and act no differently than an individual in the courts in the state.  This entity may or may not have tax preferential treatment and that depends on its application with the Department of Taxation.  At the federal level, the entity must have a nonprofit/nonstock/incorporated association status from the state in order to apply for some form of tax exempt status.

Some examples of tax exempt entities include:

  •       Religious Groups
  •       Churches
  •       Local Governments
  •       Regional Government and Authorities
  •       Some Bond Funds related to State and/or Federal Programs
  •       Smaller Social Groups and/or Community Groups
    •    Homeowner Associations
    •    Social Purpose Groups
    •    Political Groups

For other organizations to receive tax exempt status, you must submit Form 1024.  Just because these groups receive tax exempt status doesn’t mean they are tax exempt completely and it does not mean they can receive contributions from individuals as a tax deductible contribution. 

 As a side note, if you don’t know if your affiliation belongs in this group, then you should talk to the head of your local church/synagogue/mosque and ask for the status letter from the IRS. For other organizations that you make contributions to, check Publication 78A. See the Resources page for the link to the Pub.

Any tax exempt organization must continue to comply with the regulations in order to maintain tax exempt status.  This includes notification to members of the status of the organization, proper documentation and filing of annual returns to the IRS and the state.  In order to receive tax deductible charitable contributions, you must possess the 501(c )3 status.  In order to receive the coveted 501(c )3 status, it takes a special type of application and compliance to the code.

It doesn’t get any easier, you see the application process can take upwards of two years to be granted this status.  You may receive a temporary determination letter of this status to begin operations until the IRS sends the final determination letter to you.

To receive this status the IRS looks at the organization’s primary purpose and they confirm that there is no individual receiving excessive compensation or benefits or inuring value from the existence of the entity.  In addition as the entity files its annual tax return, Form 990, the IRS confirms that the entity is spending a minimum ratio of its proceeds for the mission.  If the entity is disqualified it will receive a tax levy and some associated penalties for failure to stay in compliance.  So you can see it is an extremely responsible act when someone says they want to start a nonprofit organization.

Even with all these barriers, roadblocks, and issues to overcome, there is no other nobler goal than to help others.  If this is what you want to do, then I suggest that you keep reading my other articles and I’ll explain:

  1.     How you get started
  2.     How to find the right folks for your board of trustees/directors
  3.     How to gain a partner or mentor organization to assist you
  4.     How to apply for the coveted 501(c )3 status
  5.     How to set up and begin operations
  6.     How to get funding
  7.     How to interact with the government and the respective authorities to deliver service to the community
  8.     How to set this up as a legacy and well recognized and respected charity

You can do this if you so desire, I can’t bring the will or energy, but I can help you with the knowledge.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.  If interested in my services as an accountant/consultant; click on My Services in the footer of this article.

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About David J Hoare (386 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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