Nonprofit organizations are usually classified as either member serving (addressing the needs of only a select number of individuals) or public. They take many forms:
- Public Benefit Organization – Charities, Foundations, Schools, Hospitals, Social Welfare or Advocacy Organizations and etc.
- Mutual Benefit Organization – Professional/Trade Associations, Chamber of Commerce, Alumni Associations and etc.
- Religious Organizations – churches of all creeds and mission groups
It’s important to note that simply forming a non-profit corporation does not automatically qualify you for federal and state tax exemption. However, only an officially recognized non-profit corporation can apply for federal and state tax exemption. This application is often referred to as the 501(c) (3) application since that is the IRS code section most commonly applicable to non-profits.
How to Form a Non-profit Organization
- File an Articles of Incorporation to Secretary of State in the state in which the non-profit organization expects to do business. Incorporation process usually takes around 10 working days. Make sure not to file under the pre-registered name by another entity.
- Exemption from State: A Form 3500 is to be filed to Franchise Tax Board. Time for completion is about four months. This must be done to avoid annual State minimum tax of $800. Applicable fee for filing Form 3500 is $25
- Exemption from Federal:
Types of Organization Forms to File Religious and Public Benefit I.R.S Form 1023 Mutual Benefit I.R.S. Form 1024
Donations made to Religious & Public Benefit Organizations can be claim as deductions. However, donations to Mutual Benefit Organizations can not be claimed as deductions. Religious Organizations are automatically receive exemption status without filing Form 1023 but still has to file the form to receive the certificate. In addition, religious organizations with donations under $5,000 per year are also exempted without filing the form.
It is safe to say that filing to receive exemption status takes up to six months and the costs to file is $750 ($300 for organizations under yearly budget of $10,000).
Here are some of the differences between a business and a nonprofit:
- When you start a business, it is for the financial benefit of its owners and/or shareholders. Profit is the goal and the business pays taxes on that profit.
- A nonprofit entity has a mission that benefits the “greater good” of the community, society, or the world. It does not pay taxes, but it also cannot use its funds for anything other than the mission for which it was formed.
- Nonprofit organizations can and do make a profit, but it must be used solely for the operation of the organization or, in the case of a foundation, granted to other nonprofit organizations.
- When a for-profit organization goes out of business, its assets can be liquidated and the proceeds distributed to the owners or the shareholders. When a nonprofit goes out of business, its remaining assets must be given to another nonprofit
What is Un-related Business Income? How is it reported? Taxed?
Unrelated Business Income exists under US tax law when an exempt organization receives regular revenues from activities that are not related to its exempt purpose (unless certain further exemptions apply). Thus, unrelated business income is taxable.
Tax Return Requirement
Generally, tax-exempt organizations must file an annual information return. Tax-exempt organizations that have annual gross receipts not normally in excess of $25,000 are not required to file the annual information return, but may be required to file an annual electronic notice (e-Postcard) Form 990-N. In addition, churches and certain religious organizations, certain state and local instrumentalities, and other organizations are exempted from the annual return filing requirement.