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Poor boy with his books

Nonprofit Organization Taxes Matter

For many Non Profit organizations, maintaining Non Profit status is the key to keeping a certain image in the public eye.


As tax season draws closer, I’m reminded of a discussion I had with a colleague not too long ago about a small charitable organization. Unfortunately, what often happens is that people with good intentions decide to create nonprofits, but they do not realize the special obligations that come with entities that do not pay tax, which is a privileged status intended for social good.

Accounting Documents

Key state offices include:

California Franchise Tax Board: determines -- along with the federal IRS -- whether an organization qualifies for state tax-exemption and whether donations may be tax-deductible.

California Secretary of State: oversees requirements for transacting business within California.

Attorney General's office: regulates the registration and reporting requirements for charities and fundraisers operating in California through its Registry of Charitable Trusts (Registry). Lawyers and auditors in its legal division investigate complaints and enforce laws related to nonprofits.

Nonprofit Organizations

A nonprofit incorporates in a state, receiving nonprofit status from the secretary of state. This may be the only designation the nonprofit needs, earning it exemption from state sales and income tax and qualifying it for state-level grants or contracts, depending on the state. Many nonprofits never apply for 501(c) status.

Nonprofit Corporation Initial Filing

To form a California corporation, the corporation must file the articles of incorporation with the California Secretary of State's office. The information required for the articles depends on the type of nonprofit corporation that is being formed, which can fall into one of three categories: nonprofit religious corporation, nonprofit public benefit corporation, or nonprofit mutual benefit corporation. The secretary of state's office does not require a specific form for the articles, but does provide a sample form for each of the three types of nonprofits through its website. After the articles are properly prepared and accepted for filing by the secretary's office, the nonprofit corporation comes into existence

Tax-Exempt Organizations

If a nonprofit wants federal tax-exempt status, it applies to the IRS for a 501(c) designation. The IRS grants the designation if the organization’s purpose qualifies it for this status, then assigns it the proper 501(c) designation for its purpose. For example, a community recreation organization might receive a 501(c)(4) designation, a national trade association might receive a 501(c)(6) designation and a children’s charity might receive a 501(c)(3) designation. The latter allows donors to receive a tax deduction if they donate money. Tax-exempt organizations sometimes start a subordinate 501(c)(3) organization to help raise and disburse tax-deductible contributions. Trade associations with 501(c)(6) status often have 501(c)(3) foundations that have a related purpose. For example, a national trade association that promotes defense attorneys might have a foundation that grants scholarships to students entering law school.

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