Benefits of 501(c)(3) Tax Exempt Status

The recognition of your organization as a 501(c)(3) tax exempt entity by the Internal Revenue Service (IRS) brings along a host of benefits as well. The main benefits include:

• Tax free income - Income earned by the organization is deemed
tax- free.
• Tax deductible donations - Donors can make charitable
contributions and receive a tax deduction on their tax return.
• Employee benefits: Employees will be entitled to various fringe
benefits like group life insurance, health insurance, corporate
pension plans etc.
• Grants – The organization will be qualified to receive private
and public grant money.
• Postage - Lower postage rates on corporate mailings.
• Public Service Announcements – Free radio and PSA
announcements in the local media.
• Limited liability – Limited liability for the directors and officers
of the organization

Federal Government Fees

State Government Fees

Tax Exempt FAQ’s

What are the differences between for profit and nonprofit corporations?

Profit corporations are authorized to issue shares of stock to shareholders in return for capital investments. Shareholders receive a return on their investments when dividends are paid or when assets are distributed after dissolution. Nonprofit corporations neither issue shares nor pay dividends, and when it dissolves, the remaining assets must be distributed to another tax-exempt nonprofit group.

What are the differences between tax-exempt and nonprofit corporations?

Nonprofit does not mean tax-exempt. A “tax-exempt organization” is a unique entity that is usually a nonprofit organization. However, a nonprofit organization cannot be exempt from Federal and State income or franchise tax until the organization applies for an exemption and the IRS and the state franchise board issues a determination of exemption.

Why form a tax-exempt nonprofit corporation?

Being organized as a tax-exempt corporation is a common requirement for obtaining grant funds from government agencies and private foundations. Generally, tax-exempt government foundations as well as private foundations and charities are required by their own operating rules and by IRS regulations to donate their funds only to 501(c)(3) tax-exempt organizations or else forfeit their own tax-exempt status.

Additionally, only tax-exempt nonprofit corporations provide donors with the incentive of an individual tax deduction on all donations given to your nonprofit. Additional benefits include, low cost mailing, discounted advertisements, and other private and governmental discounts.

Does my corporation qualify as a tax-exempt nonprofit?

To qualify for exemption under the Internal Revenue Code, your organization must be organized for one or more of the purposes specifically designated in the Code. For an organization to qualify under a 501(C)(3) exemption, it must be organized for one or more of the following purposes:

• Charitable
• Religious
• Educational
• Scientific
• Literary
• Testing for public safety
• Fostering national or international amateur sports competition
• The prevention of cruelty to children or animals

Additional tax exemptions exist under separate sections of the IRC for groups including: labor unions, chambers of commerce, social and recreational clubs, fraternal societies, civic leagues, credit unions, farmers’ coops and mutual insurance companies, and legal service organizations. LegalFilings also provides tax exempt filings for these types of organizations listed above.

What are the disadvantages of forming a tax-exempt nonprofit?

Your nonprofit income activities will be in most part restricted to the stated purpose of your tax-exempt basis. Income from sources unrelated to the purpose of the organization will be taxable. If this unrelated income starts to become a substantial portion of the income earned, this could attract attention from the IRS and prompt a reconsideration of the 501(c)(3) tax-exempt status.

Additionally, you will not be able to benefit from the value of any assets of the nonprofit corporation. All assets of the corporation must be dedicated to tax-exempt purposes. Upon dissolution of the corporation, all assets must be distributed to other 501(c)(3) corporations.

Furthermore, payments of dividends to shareholders or payments of profits to directors, officers, members or staff are prohibited, however reasonable salaries are allowed.

Can a nonprofit corporation make a profit?

Yes. A nonprofit corporation can take in more money than it spends. It can use the tax free profits for its own operating expenses including salaries. What a nonprofit corporation cannot do is distribute any profits to officers, directors or employees.

Am I required to file both federal and state exemptions?

Although most state tax exempt laws are patterned after the Internal Revenue Code, obtaining state exemption is a separate process from obtaining federal exemption. Even if an organization has obtained federal exemption, it must follow the procedures of the state franchise tax board to obtain state tax exemption. In some states, it is possible to obtain state tax exemption before securing federal exempt status.