Many people have heard of tax exempt organizations, yet not everyone is clear on what the term means. A tax exempt organization is one that is exempt from paying federal income tax. There are 29 types of nonprofit organizations that the Internal Revenue Service recognizes as exempt from at least some federal income tax. The eight most common types of tax exempt nonprofit organizations are:
• Testing for Public Safety
• Developing Amateur Sports Competitions
• Preventing Cruelty to Children or Animals
Belonging to one of these categories does not automatically indicate that you will receive tax exempt status. Scientific organizations must execute research that is in the interest of the public. Educational organizations cannot advocate a particular political viewpoint. The Internal Revenue Service has the final say on which organizations qualify for tax exempt status after a thorough application process.
The Internal Revenue Service provides two publications which lists nonprofit organizations that are recognized by the IRS. IRS Publication 557 provides detailed information on the following topics:
• Application, Appeals and Approval
• Filing and Disclosure Requirements
• Section 501(c)(3) Organizations
• Other Section 501(c) Organizations
• Excise Taxes
• How to get Tax Help
The second publication is IRS Publication 526. This publication clarifies how charitable organizations can claim a deduction on charitable donations. It also covers which organizations are eligible to receive the deductions, the amount that is deductible, the types of contributions that are deductible, the proper records to keep and how to report the deductions.
Both these publications are available on the Internal Revenue website and contain an abundance of helpful information regarding tax exempt organizations. There are 15 different classifications of nonprofit organizations. 501(c)(3) is the most common type of nonprofit organization recognized by the IRS. All 501(c)3 organizations are considered either a private foundation or a public charity. A private foundation is one that does not qualify as a public charity. These foundations can be classified as either private operating or private non-operating foundations. They are eligible to receive some of the compensation that public charities receive.
Seeking legal advice is important when applying for tax exempt status. The numerous federal and state tax forms that organizations are required to complete can be complex. Enlisting the aid of a qualified business attorney who specializes in nonprofit organizations can be crucial to the development of your organization. A competent business lawyer will be able to guide your organization throughout the entire process. This will allow you to receive the legal guidance essential to setting up a tax exempt organization and help prevent legal issues from arising in the future.
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