Organizing tax exempt nonprofits
By Paul Rovella
Lombardo
&
amp; Gilles
In general we like non-profits because they are formed not for
the purpose of generating profits for shareholders or members, but
for some beneficial public purpose, and provide much needed
services such as food to the needy, support for state and federal
parks, or college scholarships for students of various ethnic,
social or financial backgrounds. Funding for nonprofits primarily
comes from donations and grants. As donors, we like contributing to
nonprofits because of the tax deductions for contributions.
Organizing tax exempt nonprofits
By Paul Rovella
Lombardo & Gilles
In general we like non-profits because they are formed not for the purpose of generating profits for shareholders or members, but for some beneficial public purpose, and provide much needed services such as food to the needy, support for state and federal parks, or college scholarships for students of various ethnic, social or financial backgrounds. Funding for nonprofits primarily comes from donations and grants. As donors, we like contributing to nonprofits because of the tax deductions for contributions.
If you are considering forming or operating a nonprofit organization, you should also determine whether or not that organization is or will be tax exempt. Often times, I hear people interchangeably use the terms “nonprofit” and “tax exempt.” It is important to note that a nonprofit can be subject to income taxes. Obtaining nonprofit status for an organization is a separate process from achieving tax exemption.
A nonprofit organization is classified based on its purpose. Public benefit organizations are nonprofits that are formed for public or charitable purposes, such as Community Food Bank. Mutual benefit organizations directly serve the interests of a smaller group of individuals/entities, such as the Chamber of Commerce. Religious organizations are nonprofits that are formed primarily for religious purposes, such as churches.
To become a nonprofit, an organization simply has to file its Articles of Incorporation (or Articles of Organization) with the California Secretary of State indicating which type of nonprofit organization it will be.
Filing Articles of Incorporation (or Articles of Organization) is not sufficient to become a tax exempt organization. Obtaining tax exemption is a completely separate and more intensive application process that must be done with both the federal and state governments. Most tax-exempt organizations are classified under the Internal Revenue Code as 501(c)(3) organizations, which are limited to entities that are “operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes…” Provided that the organization is doing business for one or more of those purposes, it is exempt from paying income taxes on contributions received. There are approximately 30 other types of tax-exempt organizations, such as 501(c)(5) (Labor, agricultural, or horticultural organizations), and 527 (political organizations). Each of these entities has a corresponding state tax exemption.
To obtain a tax exemption, an organization must make a separate application to the Internal Revenue Service (IRS) and California Franchise Tax Board (FTB). The IRS and FTB require that an applicant provide information about the organization, its directors and officers, the activities to be conducted, fundraising mechanisms, and financial history and outlook. The tax-exempt decision may take anywhere from three to nine months. Tax exemptions are usually retroactive, meaning that the tax exemption will apply to past activities and contributions occurring within a limited period of time provided that the organization meets certain filing deadlines and requirements.
Because forming a tax-exempt nonprofit is a complicated and lengthy process, people interested in forming or operating such an organization should consult with an accountant or an attorney for more information on the filing and maintenance requirements.
This column is the work product of Lombardo & Gilles, LLP, which has offices in Hollister, Chowchilla and Salinas. Paul Rovella is an attorney with Lombardo & Gilles, LLP. You may contact the author at 630-1722 or [email protected]. Mail your questions to Paul Rovella, It’s the Law, c/o The Pinnacle, 380 San Benito St., Hollister, CA 95023.
