What are the tax consequences of operating as a non-profit corporation?

Non-profits will want to apply for and obtain federal and state nonprofit tax exemptions. Many groups don't want to form a non-profit unless they can qualify for tax-exempt status. Unfortunately, you must form your corporation before you submit your federal tax exemption application because the IRS requires that you submit a copy of your filed articles with the exemption application. Still, you should carefully review the tax exemption application before you submit your corporation papers. Doing so will give you a good idea of whether your organization will qualify for a tax exemption or not.

Most organizations obtain a federal tax exemption under Section 501(c)(3) of the Internal Revenue Code, for charitable, educational, religious, scientific, or literary purposes. States typically follow the federal lead and grant state tax-exempt status to nonprofits recognized by the IRS as 501(c)(3) organizations.

To qualify for a 501(c)(3) IRS tax exemption the organization must meet the following conditions:

  • The assets of your nonprofit must be irrevocably dedicated to charitable, educational, religious, or similar purposes. If your 501 (c)(3) nonprofit dissolves, any assets it owns must be transferred to another 501(c)(3) organization. (In your organizational papers, you don't have to name the specific organization that will receive your assets-a broad dedication clause will do.)
  • Your organization cannot campaign for or against candidates for public office, and political lobbying activity is restricted.
  • If your nonprofit makes a profit from activities unrelated to its nonprofit purpose, it must pay taxes on the profit (but up to $1,000 of unrelated income can be earned tax-free).

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