FAQS: Nonprofit Organizations
Q: Is there a difference between a nonprofit organization and a tax-exempt one - and what do you need to do to make your organization tax-exempt?
A: Although most nonprofit organizations are exempt from federal income tax, nonprofit status is determined by state law and does not necessarily guarantee that your organization is tax-exempt. For the latter, you will need to apply for recognition of exemption as determined by the requirements of the Internal Revenue Code, which The McLawhorn Firm can help you navigate.
Q: Once my nonprofit is set up, what forms will I need to file?
A: Form 990 is the big one, required by most tax-exempt organizations with $25,000 or more in gross receipts. If your gross receipts and assets are below a certain threshold, you may be able to file a Form 990-EZ or an annual electronic notice. Organizations such as private foundations, employee benefit trusts and religious and apostolic organizations are required to file Form 990 alternatives. We can help you understand and file the necessary paperwork for your nonprofit.
Q: What kinds of nonprofits qualify for a charitable contribution deduction, and what rules dictate the tax savings?
A: Charitable donations are tax-deductable to most nonprofit organizations, including churches and other religious organizations, a unit of the U.S. government (e.g., the State of Maryland), public organizations (e.g., a community chest), certain private foundations, certain membership organizations, certain medical research organizations and tax-exempt hospitals and educational organizations. Donors cannot deduct contributions to needy individuals, foreign governments, foreign charities, certain private foundations and organizations that devote what is deemed to be a "substantial" percentage of their activities on influencing legislation.
Donors are rewarded not only by the satisfaction of contribution to your cause but also with tax savings, starting with 15% of the value of the donation. (Charity Navigator {link} and a tax advisor can help you determine the specifics.) These deductions are claimed in the tax year the donations are made. There are limits on how much a person can deduct: Generally if you donate 20% or more of your gross income each year, you should consult with a professional.
Q: I want to establish a shelter to help battered women and their children. Will donors of non-cash items, like household goods, be able to receive a tax benefit?
A: Absolutely. However, the IRS only allows this deduction on items "in good condition or better," so make sure you have quality control measures in place, particularly for items for which a deduction of $500 will be claimed (These may require an appraisal.). Also-and this is true with cash donations as well-be sure to document the donation with a receipt that states the name of your organization, the date of the donation and its monetary value.
Q: When I told friends and family that I was starting a nonprofit, they warned me about unrelated business income. What is this - and what do I need to watch out for?
A: If you have a regularly operating trade or business that is not substantially related to the core purpose of your tax-exempt organization, and if this business earns $1,000 or more of gross annual income, you will need to report this income and pay tax on it by filing 990-T.
Have questions of your own? Contact The McLawhorn Firm today for a consultation.
IRS CIRCULAR 230 DISCLOSURE: Unless expressly stated otherwise, any U.S. federal tax advice contained in this website is not intended or written by THE MCLAWHORN FIRM to be used, and any such tax advice cannot be used, for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.
