A tax exempt entity is a corporation or organization that is not required to pay federal income taxes to the IRS. While many people think that nonprofit organizations, or companies that are created to provide services rather than gain profit, are always tax exempt, this is actually not true.
To become a nonprofit organization, you must be approved by your state. Once you are declared nonprofit at the state level, you are given certain benefits, such as not having to pay your state taxes. But to be considered a tax exempt entity, you must reach higher. Tax exempt is a qualification only given at the federal level and granted directly from the IRS. This designation can only be given to companies and organizations that have already been labeled as nonprofit by their state. Once they achieve this, they must file paperwork with the IRS to request tax-exempt status. If you get approved for this, you will not have to pay any federal income taxes.
In order to be considered for tax exemption, your organization must:
- Benefit the good rather than the owner
- Must not operate to lobby or advance a political campaign, or any other action activities
- Must be organized to operate primarily for purposes such as charity, religion, education, public safety, or civil rights
Although you must be labeled as nonprofit by your state, receiving tax exempt status will not have any say in whether or not your state also grants you tax exempt. Organizations that are granted a tax exemption from the IRS must still pay payroll taxes and any other employment taxes, and if not exempt from their state, will have to pay state taxes as well.
The types of organizations that are able to apply for tax exempt status include:
- Organizations protecting children
- Organizations protecting animals
- Entities focused on education, literature or science
- Entities that help to push public safety
- Business leagues, fraternal organizations, and social clubs
- Charitable and religious organizations
If you are looking to file for tax exempt status, there are certain forms you must fill out with the IRS. There are many tax-exempt forms, so it’s important to file the one that fits your specific organization. Failing to fill out the forms correctly could lead to your instant denial of tax exempt status.
To ensure you apply correctly and get the tax exemption you need to successfully run your nonprofit organization, you should enlist the help of an experienced tax professional. Contact Levy, Tax & Associates at 1-800-TAX-LEVY or visit their website to learn more.