The meaning of nonprofit or not-for-profit is that no person either through ownership or control can derive profit from the organization. Exempt on the other hand is a reference to an organization’s not being liable to pay income tax. The tax exemption applies to activities performed that fit within the organization’s defined charitable purpose. The tax exemption provides an operational cost saving benefit to the organization.
Is all of the income received by a nonprofit, tax exempt?
It’s important that a tax exempt organization understands that activities it performs outside of its charitable purpose may be taxable. Such activities that constitute a trade or business carried on regularly that are not substantially related to furthering the exempt purpose of the organization must be reported as part of the organization’s tax return and a tax paid. This income is so-called unrelated business income.
Unrelated busines income must be limited to an “insubstantial” amount of the organization’s income or the organization could risk losing its nonprofit status granted by the IRS. It may be important for a nonprofit organization to seek legal counsel in order to ensure that the organization does not risk it’s very important tax exempt status.
In general, exempt organizations are required to file annual returns, although exceptions apply. If an organization does not file a required return or files late, penalties may be assessed. In addition, if an organization does not file as required for three consecutive years, the law provides that it automatically loses its tax-exempt status.
Exempt organizations, other than private foundations, must file their annual information re-turns on Form 990 or 990-EZ, unless excepted from filing or allowed to submit Form 990-N (organizations wtih less than $5000 in the past year).
Tax-deductible contributions made by contributors
Donations made by a contributor may be tax deductible, on behalf of the contributor. In addition to the tax benefit that a nonprofit may enjoy, often though not always, donations to tax-exempt organizations also are tax-deductible to the entity making the donation.
For example, churches that are typically 501(c)(3) organizations can receive tax-deductible donations. Other 501(c)(3) organizations include nonprofit organizations established exclusively for one of the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals. Contributions to 501(c)(3) organizations are tax-deductible.
On the other hand, donations to certain organizations 501(c)(4) organizations, (such as social welfare and civic organizations), don’t qualify to be tax deductible. However, there are two 501(c)(4) organizations that do qualify for charitable deductions i.e. veterans organizations with 90% war veteran membership and volunteer fire departments.
“The benefit of the tax deduction for contributions to qualified organizations is that the tax deduction often provides an incentive for contributors to make donations.”E. P. Tremblay, Esq.
“The benefit of the tax deduction for contributions to qualified organizations is that the tax deduction often provides an incentive for contributors to make donations.”
Organizations for whom contributions may be tax deductible
An understanding about which donations given to a nonprofit is important to both the organization and contributor because contributors want to avoid taking tax deductions to which they are not entitled. The recipient organizations also want to avoid the situation in which they might have to tell a contributors that the contributor has taken a deductions to which he or she may not be entitled.
The table below, excerpted from IRS Publication 557, provides the reader with a list of nonprofit organizations for whom contributions made to them, may be tax-deductible.
|501(c)(1)||Corporations Organized under Act of Congress (including Federal Credit Unions)||Yes|
|501(c)(2)||Title Holding Corporation For Exempt Organization||No|
|501(c)(3)||Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations||Yes|
|501(c)(4)||Civic Leagues, Social Welfare Organizations, and Local Associations of Employees||No, generally*|
|501(c)(5)||Labor, Agricultural, and Horticultural Organizations||No|
|501(c)(6)||Business Leagues, Chambers of Commerce, Real Estate Boards, etc.||No|
|501(c)(7)||Social and Recreational Clubs||No|
|501(c)(8)||Fraternal Beneficiary Societies and Associations||Yes|
|501(c)(9)||Voluntary Employees Beneficiary Associations||No|
|501(c)(10)||Domestic Fraternal Societies and Associations||Yes|
|501(c)(11)||Teachers’ Retirement Fund Associations||No|
|501(c)(12)||Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, etc.||No|
|501(c)(14)||State-Chartered Credit Unions, Mutual Reserve Funds||No|
|501(c)(15)||Mutual Insurance Companies or Associations||No|
|501(c)(16)||Cooperative Organizations to Finance Crop Operations||No|
|501(c)(17)||Supplemental Unemployment Benefit Trusts||No|
|501(c)(18)||Employee Funded Pension Trust (created before June 25, 1959)||No|
|501(c)(19)||Post or Organization of Past or Present Members of the Armed Forces||No, generally*|
|501(c)(21)||Black Lung Benefit Trusts||No|
|501(c)(22)||Withdrawal Liability Payment Fund||No|
|501(c)(23)||Veterans’ Organization (created before 1880)||No, generally*|
|501(c)(25)||Title Holding Corporations or Trusts with Multiple Parent Corporations||No|
|501(c)(26)||State-Sponsored Organization Providing Health Coverage for High-Risk Individuals||No|
|501(c)(27)||State-Sponsored Workers’ Compensation Reinsurance Organization||No|
|501(c)(28)||National Railroad Retirement Investment Trust||No|
|501(c)(29)||CO-OP health insurance issuers||No|
What can contributors to a nonprofit deduct?
In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60 percent) of the taxpayer’s adjusted gross income (AGI). Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income. Contributions that exceed that amount can carry over to the next tax year. To qualify, the contribution must be:
- a cash contribution;
- made to a qualifying organization;
- made during the calendar year 2020
Contributors may deduct a charitable contribution made to, or for the use of, any of the following organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code:
- A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes;
- A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
- A church, synagogue, or other religious organization;
- A war veterans’ organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions;
- A nonprofit volunteer fire company;
- A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
- A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
- A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.
There are additional rules that determine whether and in what amount contributions made to a nonprofit organizations are deductible, that are not within the scope of this short article that the reader or professional providing counsel to a nonprofit organization should take into consideration.