A friend is putting together a local cancer support group and I promised to help her with the tax-exempt status paperwork. Last night I spent a while explaining to her board what was involved and busting a few myths. It’s a confusing subject. I’ve have people tell me that they are set up as a non-profit and they assume they don’t have to file a return (not), clients bring in what they think are charitable contributions to find that they aren’t. So, a little primer might be in order.
Tax exempt organizations cover a wide variety of groups that aren’t organized to make money. A social or business club can be tax-exempt as well as a recreation club or labor organization. In the Internal Revenue Code, most of the organizations are listed in sub-section 501. All have to be established under their state law, in Kansas they are a non-profit corporation. Then they have to apply to the IRS for tax exempt status with Form 1024. Once they’re approved, they will file an annual return with the IRS. These are the Form 990 series of return. The actual return will depend on the amount and type of income. The 990s are information and there is generally no tax on any profit the organization has. But contributions to these groups are not deductible on your tax return as a charitable contribution. Let me repeat that, contributions most tax exempt organizations can’t be deductible.
For a donation to be deductible for you, it has to go to a 501(c)(3) organization. These are limited and very specific types of tax exempt organizations. The list included churches and religious groups, and organizations with educational, literary, scientific, public safety, animal and child protection and national and international amateur sports focuses. They provide benefits to the general public. (Other tax exempts groups are more for the benefit of their members.) A 501(c)(3) organization also has to be a state corporation but they apply to the IRS using Form 1023. They also file a 990 return each year.
Whether a tax exempt organization qualifies for deductibility, they follow specific rules because of their tax status. Their tax returns are public and there are limits on the advocacy (lobbying) they can do. They can also pay taxes on some of their income. If they have income from sources other than their tax exempt purpose over $1000, they could be subject to taxes on that income. For example, a social group raises operating money from dues and a regular food booth at a flea market. The money from the food booth is unrelated business income and it’s offset by the expenses to produce the income and that profit is taxed (nothing from dues is taxed just reported on their regular 990). The food booth income and expenses are reported on form 990-T. (And yes it's more complicated than that. We are dealing with taxes.)
To quickly recap, not all non-profit corporations are tax exempt on the federal level. And only special tax exempt organizations have qualified to have your contributions counted as a charity contribution (you can still give the others money, you just can’t deduct it on your Schedule A.)