Not for profit corporation tax is tax liability that is different than other corporations due to their operation as a charity operation that does not function as a way to earn a profit. The IRS tax code Section 501 provides a federal tax exemption for nonprofit organizations that engage in both private and public activities without pursuing either commercial or monetary growth.

How to Qualify

To qualify for this exemption from personal taxes, nonprofit organizations will have to meet certain rules. Some of the rules include:

  • Operating and being organized for the sole use of charitable, religious, or public safety purchases.
  • Collecting the income the corporation earns and turning over what is left after expenses to an organization or individual that is involved in legitimate of recognized charities.

When a nonprofit organization performs or engages in activities that are not related to the original organization purposes, then they can be subject to pay income taxes on the money earned. An example of this would be a nonprofit company that provides shelter for homeless people but makes some money selling scooters. The income made from selling the scooters is subject to income tax.

In addition to being exempt from paying federal tax, nonprofit corporations are also exempt from sales tax and property tax. Though nonprofits are required to pay employee taxes such as Medicare and Social Security.

Filing With the IRS

Even though they are tax-exempt, most nonprofit organizations will be required to file an annual tax return with the IRS. This can be done through an informational return, referred to as a Form 990

Most nonprofit tax-exempt organizations are required to file annual tax returns with the IRS. This form will allow the general public to be able to evaluate such things about the nonprofit, such as its:

  • Operations
  • Mission
  • Programs
  • Finances

There are various types of 990 forms that will need to be filed depending on the year the organization is filing for as well as the amount of money the organization received. The various forms are the:

  • 990
  • 990-EZ
  • 990-N

While most nonprofits file an annual return, not all do. Some organizations that are not required to file a Form 990 include:

  • Faith-based nonprofits
  • Religious schools
  • Missionary programs
  • Subsidiaries of nonprofits, as these are covered under the tax return of the primary organization

You may verify whether or not your nonprofit organization will be required to file a tax return by contacting the IRS. Your organization's Form 990 will always be due by the fifteenth day of the fifth month following the end of your organization's taxable year.

Failing to file a Form 990 return when required can result in the IRS automatically revoking an organization's tax-exempt status. There have been more than half a million nonprofits who have lost tax-exempt status since 2011 due to failure to file a return.

There is no process of appeals once you have lost your tax-exempt status, and without it, your corporation will have to begin paying income taxes.

Nonprofit Versus Tax-Exempt: What Is the Difference?

Tax-exempt and nonprofit are two completely different concepts. Nonprofit is a designation given under state law, and tax-exempt refers to the federal income tax exemptions that are granted under the IRS tax code in some states.

Nonprofits:

  • Are organizations to serve a public purpose.
  • Are created around a cause, mission, or community need.
  • Can be set up in several different formats such as nonprofit corporations, charitable trusts, limited liability companies, or unincorporated associations.
  • Are not automatically exempt from federal tax law.

It is important to remember that a nonprofit organization is part of state law concepts and will be subject to specific state laws for organization and structure. If you are planning on forming a nonprofit organization, you should check with your state law or the state laws that govern where you are incorporating.

Tax-exempt status:

  • Will exempt a nonprofit from having to paying federal income tax on income that has been generated from any activities that are considered substantially related to the organization's original purposes or goals.
  • Requires approval from the IRS if the organization meets all requirements, applies for it, and maintains it the required informational tax return filings.

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