While people loosely refer to a charitable organization under the term “nonprofit”, the term fails to convey the fact that there are two elements to a full-blown Tax-Exempt Nonprofit Corporation:
- 1Creation of the Entity: One must incorporate at the State level (with the Secretary of State) as a Nonprofit Entity – most states offer the designation of Nonprofit Corporation, which is the preferable type
- 2Obtaining the 501(C)(3) Tax Status: This is an entirely separate process to request that the IRS bestow Tax-Exempt Status on your entity.
It is left to the State to create or charter the entity, while the Federal Government controls the Federal tax status of the entity. (Yes, we can help with any and all of these processes – find out how).
Aside from the societal benefits, there are many legal advantages to being granted tax-exempt status by the IRS. Among them are tax exemption, the right to solicit donations, qualification for grants, employee benefits, and lower postal rates.
Nonprofits that have successfully applied under 501(C)(3) are generally exempt from paying federal, and state income, and certain employment taxes. State taxation authorities generally defer to the tax status granted by the IRS – so if an organization is not taxed on income by the IRS, its income won’t be taxed by the state! A separate exemption process may apply for sales and other state taxes, and yet another process almost certainly will apply if there’s a desire to avoid local and municipal taxation.
Tax-exempt entities are also eligible for tax-deductible charitable donations – meaning the donor can write off the equivalent amount against income. This is appealing to donors because they know that their donations will reduce their tax liability. This is especially beneficial because nonprofits have the right to solicit those donations! As a nonprofit, fundraising, including donations and grants, will be a major source of income during every stage of the business. Finally, nonprofits are not required to pay unemployment compensation, but can offer health and life insurance.
Saving funds where possible is also an important part of a nonprofit’s core mission, and there are many “special considerations” offered to tax-exempt nonprofits by government and corporations lower postal rates as a bulk mailer definitely fits in the “saving” category.