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Nonprofit and Tax-Exempt Organizations

Many groups can benefit from the tax exemptions offered by the Internal Revenue Service for qualifying undertakings. The process of becoming tax exempt is long and complex. The procedure requires time, money, and knowledge of legal and tax implications to succeed. When the IRS grants tax-exempt status, the organization must comply with operational rules, which mandate vigilant accounting and verification—often requiring ongoing professional assistance. The benefits of tax exempt status, however, far outweigh the hassles of the process.

An organization that wants tax-exempt status must begin by incorporating as a nonprofit corporation. After the organization is created it may apply for tax-exempt status. Nonprofit corporation laws, which are really business formation laws, govern formation of these organizations. As a general rule, a nonprofit may engage in activities with a profitable purpose. This is not to say that nonprofit corporations cannot turn a profit. It is only to say that the goal cannot be to generate profit for the benefit of persons with interests in the operations.

Qualifying groups may incorporate just as their profit-minded cousins do. The organization must meet legal requirements and must file documents with the Secretary of State. These documents must conform to precise legal standards because they will be submitted to the IRS with the application for tax-exempt status.

Once the nonprofit corporation is formed, the most common way to obtain tax-exempt status is to apply under Section 501(c)(3) of the Internal Revenue Code. Nonprofit corporations qualifying under 501(c)(3) enjoy exemptions from federal, state, and local taxes, and donors may write off contributions on their individual tax returns.

The Internal Revenue Service permits organizations to file for tax-exempt status under section 501(c)(3) if they fit one of several categories:

  • Charitable purpose
  • Educational organization
  • Literary purpose
  • Prevention of cruelty to children or animals
  • Religious group
  • Scientific organization
  • Testing for public safety
  • To foster national or international amateur sports competition

The IRS classifies these categories broadly but does not authorize applications without proper consideration. For example, scientific organizations must carry out research of public importance, and educational organizations cannot advocate any particular political position.

Upon official notification of exempted status, the nonprofit should confirm tax-exempt status in Minnesota. The organization should not assume that it is tax exempt for State purposes unless it receives proper authorization.

Nonprofit incorporation and federal tax exemption involve complex legal and taxation issues that should be undertaken with professional assistance. A nonprofit corporation lawyer can oversee the application process and ensure that the organization meets statutory requirements.

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