How do nonprofits become exempt from federal income tax?

On Behalf of | May 10, 2019 | Income Tax

There are a lot of businesses in the state of Connecticut that claim to be non-profit. Non-profit can mean a number of things, but here it will be used to specifically discuss the income tax benefits offered to charitable organizations. What types of charitable organization can qualify for tax exemptions, and how can they obtain that benefit?

In order to qualify as a charitable organization, the business must receive the majority of its income from the government or the general public. In order to receive tax-exempt status, such organizations must apply for what is known as 501(c)(3) status. In order for one’s request to be approved, it will be necessary to show the government that:

  • One’s organization is to be used for exempt purposes only.
  • One’s organization does not work to benefit any private interest.
  • One’s organization will limit its political activities.

If one applies for non-exempt status and it is approved, there are many benefits that one’s organization will enjoy. Some of these include tax exemption, tax deductions for donors, limited protection from legal claims, and the ability to receive grants from the government or other foundations. There are, of course, a few drawbacks as well, including seemingly unfair profit shares, unrelated income becomes taxable, and assets remaining when the organization closes must be donated.

Those in Connecticut who have businesses or foundations that they would like to be exempt from federal income tax have to jump through quite a few hoops to make it happen. There are a number of forms that have to be filed in a specific time frame and certain documentation that must prove one’s organization meets all the necessary criteria. Thankfully, a tax attorney can assist those who wish to achieve tax exemption status in doing everything that is necessary for their organization to be considered.