What Does Tax Exempt Mean?
The taxability of nonprofit revenues is an area that often creates a lot of confusion for board members and staff. There is a tendency to think that nonprofits are exempt from all tax. But, the term "tax-exempt organization" really only refers to the federal status awarded to the entity under IRS tax code 501(c)3. Below is list of the common taxes that nonprofits need to be aware of. If you'd like more information about any of the specific revenue or tax issues noted below, feel to reach out and we can discuss your specific situation and questions.
• Most nonprofits are corporations that have been given tax exempt status under IRS code 501c3.
• Revenues are generally deemed exempt from tax unless they meet the criteria for being taxable.
• Taxable revenue streams are called Unrelated Business Income(UBI) and are taxed at regular corporate tax rates. You should discuss new revenues with your CPA to determine if you need to include tax planning.
• The tax status of your revenues is determined by the type of income stream, NOT by how you intend to use the revenue to support your mission.
• Organizations and employees are subject to federal payroll taxes (withholding, Medicare and Social Security).
• Organizations are exempt from Federal Unemployment Tax (FUTA). This often gets missed in payroll systems and 3rd party payroll providers.
• Most organizations are set-up as nonprofit corporations.
• Revenues are generally deemed taxable unless they are specifically considered exempt.
• Organizations should file B&O tax returns like other organizations unless they have received a waiver.
• Organizations are NOT exempt from sales tax. You may qualify for a reseller’s permit for certain fundraising events, but in general, nonprofits must pay sales tax like any other business.
• Annual filings are required to retain Charitable Solicitation and Nonprofit Corporation Status.
• Employers and employees must pay state payroll taxes.
• Check with your local city and county tax authorities for their taxing and filing rules for nonprofits.