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Is your charitable organization tax exempt?

| Dec 15, 2016 | Tax Law |

Starting a charitable organization is unarguably a kind thing to do. Just as important as the charity work you do is how you run your nonprofit, not only for the benefit of the cause you serve but also for your own advantage. You may think that your charitable organization is automatically tax exempt by nature, but it needs to meet specific requirements and follow certain rules to receive and maintain the status of tax exemption. The Internal Revenue Code outlines these standards in section 501(c)(3).

Definition of a charitable organization

The IRS defines an organization as charitable based on its establishment type, purpose and how much of its operation focuses on the cause. A charity can be a corporation, unincorporated association, foundation, community chest, fund or trust. These are purposes that qualify as tax exempt:

  • Advancing education, such as reading or science
  • Spreading religion
  • Relieving the poor and distressed
  • Preventing cruelty to children or animals
  • Building and maintaining monuments and other public edifices
  • Eliminating discrimination and defending human rights
  • Promoting amateur sports

The purpose cannot be to profit someone who has private interests in the organization, such as a family member or shareholder. You must include in your organizing documents where your assets will go if your organization dissolves. Your options are to give them to any exempt purpose, to another charitable organization or to the government at the local, state or federal level for the public to use.

Restrictions of a charitable organization

Your organization cannot be involved in any campaign activities to oppose or endorse a political candidate. The rule does not apply to voter education and registration programs that have no political bias. Furthermore, your charity can only participate limitedly in lobbying, with how much focus you give and money you spend determining the limit of your involvement. Breaking these rules results in your having to pay taxes on all income earned in that year. You may also have to pay an excise tax depending on your type of organization.

There are also rules concerning how to handle charitable donations, with all but public safety testing eligible to receive them. Each type of charity may also have additional regulations.

Assistance for your charitable organization

Establishing your charity requires a lot of paperwork and understanding of tax law. It can be difficult to navigate on your own. It would be to your benefit to hire an attorney with experience in tax planning for charitable organizations to ensure you complete the process correctly and avoid having to pay taxes.

We insist that your taxpayer rights are protected and your options are known.

Our services are confidential and are protected under the attorney-client privilege as allowed by law.