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What Counts as a Tax Exempt Entity?

What Counts as a Tax Exempt Entity?

By on Sep 14, 2016 in Tax Tips | 0 comments

what-counts-as-a-tax-exempt-entityDid you know that there are some businesses that don’t have to pay taxes?

If you’re curious as to whether or not the kind of business you’re operating qualifies, then it’s just a matter of assessing the nature of your business. A big clue is if you’re running a nonprofit organization.

If you’re managing a nonprofit organization, chances are your business might be tax-exempt. Just because you run a nonprofit business does not necessarily mean that your business is automatically tax-exempt either. This has everything to do with you being knowledgeable about the difference between being tax-exempt and having a nonprofit organization, and then taking the necessary actions to file your business with the Internal Revenue Service (IRS) as such.

The Difference Between Tax-Exempt and Nonprofit

Tax-exempt businesses are entities that do not have to pay federal taxes. The IRS determines what types of nonprofit agencies are tax-exempt. A nonprofit company won’t have to pay taxes at a state level, but that doesn’t mean that the business won’t have to pay federal taxes. The business must file all of the necessary paperwork to submit to the IRS in order to determine whether or not it qualifies as tax-exempt.

As a nonprofit business, it’s important to understand the laws for such entities. Each state has its own laws for nonprofit status. Nonprofit and tax-exempt is not the same thing. So it’s in your best interest not to treat your business as such. Misunderstanding the two could lead to costly tax fees.

What Types of Businesses Qualify?

As aforementioned, any type of nonprofit organization can qualify to be a tax-exempt entity. The most obvious ones are the charitable and religious organizations. But there are also businesses that have the mission of free education, literature, and/or public entertainment like PBS television.

There are even some nonprofit sports teams that qualify like little league teams. Of course there’s also organizations that set out to maintain the wellness of children, veterans, and animals. Shriner’s Hospital for Children, Wounded Warrior Project and the Humane Society are good examples of organizations that have filed for a 501(c)(3) filing.

What is a 501(c)(3) Filing?

A 501(c)(3) filing is the tax code that the IRS uses to describe tax-exempt entities. You might recognize it in your own personal tax filing as a charitable donation. If you’ve ever given to Goodwill or Salvation Army, they might ask you if you’d like an itemized receipt for your donation. Even religious organizations may supply you with a document that states the total amount of money you’ve donated to them at the end of the year. That’s because all charitable operations are required by law to supply all of their donors with a tax receipt that states how much they gave so that:

  1. The giver can report how much they’ve donated to that organization. Since that organization is tax-exempt, the donor will receive a tax credit for supporting the business.
  1. The organization itself has to account for all of the money that they’ve taken in to run the operation. Because they are tax-exempt, they need to prove that all of the money they used to keep the business afloat was donated.

There’s so much more to know about tax-exempt entities. If you’re interested in learning more, contact the knowledgeable professionals at Success Tax Relief today at 1-877-825-1179 or reach us online right now!

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