What is a Nonprofit?
Posted on Wednesday, September 25, 2013
Many nonprofits perform a service that would otherwise come from the government. In return, the government provides a benefit to nonprofits of being tax exempt. Most nonprofits fall under Section 501(c)(3) of the Internal Revenue Service (IRS) tax code.
Although these organizations are called nonprofit, that does not mean that they cannot or should not make a profit. It means that nonprofits, unlike for profit businesses, do not exist to make money for the owners or investors.
Nonprofits differ from other organizations in the following ways.
Mission. Every nonprofit has a mission statement that states why the organization exists and what need it was created to fill.
Funding. Nonprofits receive revenue from private contributions (individuals, businesses and foundations), as well as government funding, fee for services and investment earnings.
Tax exemption. Charitable organizations are exempt from state and local property taxes; federal, state and local income taxes; and state and local sales tax. However, nonprofit must pay taxes on unrelated business income. This exemption is acknowledgement that an organization is performing an activity that otherwise would need to be performed by the federal, state or local government.
Public benefit. Nonprofits provide a service to society. They exist to benefit the public as a whole.
Transparency. Nonprofits are granted a special tax status to produce something to benefit the public. The public is in many ways the ultimate shareholder of the organization. In return, nonprofits have an obligation to the public and must be transparent to gain the public's trust. Nonprofits are required to make available their annual information return, Form 990, to the public.
Nonprofit status is a state law concept. Nonprofit status may make an organization eligible for certain benefits, such as state sales, property, and income tax exemptions. Although most federal tax exempt organizations are nonprofit organization, organizing as a nonprofit at the state level does not automatically grant the organization exemption from federal income tax. As an example, being organized as a nonprofit organization in Indiana does not make the organization exempt from Indiana taxes until the organization is exempt from federal income taxes. To qualify as tax exempt from federal income taxes, an organization must meet requirements set forth in the Internal Revenue Code (www.irs.gov/charities).
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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