Benefits of Tax-Exempt Status under IRS Section 501c3
Tax exemption under Internal Revenue Code section 501c3 provides organizations with the following benefits:
- Exemption from Federal income tax;
- Tax-deductible contributions;
- Possible exemption from state income, sales, and employment taxes;
- Reduced postal rates;
- Exemption from Federal unemployment tax; and
- Tax-exempt financing.
Tax-Exempt Organizations and 501c3's
A tax-exempt organization can be a trust, unincorporated association, or nonprofit corporation described in the Internal Revenue Code as being exempt from Federal income tax. A 501c3 is a type of exempt organization. It must be organized and operated for one or more exempt purposes described in IRS Code section 501c3:
- Testing for public safety,
- Fostering national or international amateur sports competition, and/or
- Preventing cruelty to children or animals.
Difference Between Nonprofit & Tax-Exempt
Many people often mistakenly believe that all nonprofits automatically have IRS 501c3 tax-exempt status. This is not true. Here is the difference between a nonprofit corporation and tax-exempt organization:
- nonprofit status refers to state-law corporate status
- tax-exempt status refers to state and federal tax exemption under tax regulations.
Many nonprofits are organized as both a nonprofit corporation and a tax-exempt entity.
A nonprofit organization, whether incorporated or not, can decide whether or not it wants to apply for tax-exempt status from the IRS and the state.
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