Here are some key tax considerations to remember when starting a non-profit organization, particularly one aiming for 501(c)(3) status:
- Exemption ≠ Automatic: While a 501(c)(3) designation grants exemption from federal income tax, it’s not automatic. You’ll need to apply to the IRS for tax-exempt status and receive a determination letter.
- Unrelated Business Income (UBI): Even with tax-exempt status, there can be taxes on income earned from activities that are not substantially related to your non-profit’s mission. For example, if you run a thrift store to generate revenue, that income may be subject to UBI tax.
- Annual Information Return (Form 990): Tax-exempt non-profits are required to file an annual information return (Form 990) with the IRS. This form provides financial information about your organization’s activities. There are different versions of Form 990 depending on your organization’s gross receipts.
- State and Local Taxes: Even with federal tax exemption, your non-profit may still be liable for state and local taxes, such as sales tax or property tax. It’s important to research the specific requirements in your state.
- Seek Professional Guidance: Tax laws can be complex, so consulting with a tax advisor specializing in non-profit organizations is recommended. They can help you navigate the application process, ensure compliance with ongoing tax requirements, and advise on minimizing potential tax liabilities.
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