Nonprofit Does Not Mean Tax Exempt

A common misconception in my field of work is the notion that an organization is exempt from paying taxes simply due to the fact that it has been organized as a nonprofit. Unfortunately, this particular misunderstanding could leave an organization facing tax debt with both the IRS and their state franchise tax board.

Nonprofit status is a concept of state law. Choosing to incorporate as a “nonprofit” or “nonstock” organization may, in fact, come with certain privileges, such as eligibility for state and federal tax exemption, however this exemption is far from automatic. I always liken tax exemption to a driver’s license- if you choose to request the privilege, you must apply, pass the test, and then, most importantly, follow the rules. For those organizations that choose not to pursue this privilege, payment of annual corporate taxes is required.

The road to tax exemption, for most nonprofits, is paved with compliance. Organizations must be familiar with all processes and procedures, and be prepared for detailed reporting. In addition to the provision of particular clauses in the organizing document that precedes an extensive application process with the IRS, charities must be mindful of state and local tax exemption and registration requirements. Additionally, organizations that have been granted exemption must be aware that that not all income received is eligible for exemption, and be mindful to pay required taxes on any unrelated business income.

Nonprofit coursework may prove to be essential for the novice director or Board member. For those whose time constraints do not warrant such coursework, the assistance of an expert may be necessary in maintaining compliance with all state and federal regulations.