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Tax Law Scoop: Being a Tax Exempt Nonprofit

By Tanya Roth, Esq. | Last updated on

Who would have expected that the culture for philanthropy would have grown in such a ravaged economy? The Wall Street Journal reported that although private giving has fallen 6% in 2008. Nonetheless, the recession seems to have triggered altruism in certain individuals and the urge to help others is stronger than ever. 

If you're of those who gave in to their altruistic instincts and started a philanthropic organization, you might have already considered making your organization a tax exempt nonprofit under section 501(c)(3) of the Internal Revenue Code. If so, you've probably already had a look at some of the formation requirements.  

But let's backtrack a bit. What is a tax exempt nonprofit under section 501(c)(3)?

A tax exempt nonprofit is one which is recognized as tax exempt by the Internal Revenue Service (IRS).  

The IRS defines the basic requirements for 501(c)(3) tax exempt nonprofits on its website. If you glance at the IRS' definition, you'll notice that there are several key elements. This series will discuss each of these elements in greater detail and through the use of practical examples. Some of those key concepts are:

  • The tax exempt nonprofit must be organized and operated exclusively for "exempt purposes."
  • "Private inurement" is not allowed.
  • There are limitations on lobbying, campaigning or electioneering

IRS tax exemption is not mandatory and contrary to what most people think, it's not even a designation that the IRS "grants" you. This might seem confusing, but when you fill out the Form 1023, you might notice that it is called the "Application for Recognition of Exemption." Thus, the concept of "granting" an exemption is essentially a misnomer.  If you are doing everything in compliance with section 501(c)(3), you're already a 501(c)(3) tax exempt nonprofit. 

Now, churches and extremely small charities are exempt from filing the 1023 form. But in order to be an extremely small charity, your gross receipts must be under $5,000. That's what you receive, not your net after expenses.

So why would you really go through all that hassle to get your IRS tax exemption if you technically don't even need it? We answered that question in an earlier post on this blog

All this making sense? 

Well, this small overview isn't intended to make you the next nonprofit expert.  But over the next few posts in this series, we'll explain the important concepts of nonprofit law to you so that you can be better equipped to discuss your options with your attorney or advisor.

Other posts to come:

  1. The Tax Law Scoop: Being a Tax Exempt Nonprofit
  2. Decoding "Exempt Purposes"
  3. What Is "Private Inurement"? The Church of Scientology's Tax Battle. 
  4. No Campaigning Here!
  5. Conducting Unrelated Business Activities? Pay Up Your UBIT!
  6. Filing 990N or EZ- Which One Is Right For You?

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