The reason justifying tax-exempt status is that some private businesses do work that the government otherwise would have to do.
Because these entities increase the public welfare, the government relieves them of taxation.
What Does it Mean to Be Tax Exempt?
The meaning of “tax-exempt” simply refers to the entity being exempted from most federal and state taxes, such as:
- Income tax
- Sales tax
- Property tax
However, if the entity has an unrelated side business, then the side business is usually subject to both federal and state taxes.
Because of tax-exempt status, some donors can claim a deduction on their taxes for their contribution to the entity. This is true if the entity is exempt under 501(c)(3), but does not apply to all tax-exempt entities.
Types of Tax-Exempt Entities
The IRS website contains helpful information listing the many different types of tax-exempt entities, including requirements for qualifying for tax-exempt status. We can only summarize some of the more popular tax-exempt entities here:
- Public charities. A public charity is usually supported by a wide donor base. Examples include the Red Cross and Salvation Army. Public charities use their funds to help members of the community according to the charity’s mission. To qualify for tax-exempt status under Section 501(c)(3), the charity cannot be operated for the benefit of a private interest. It must also be organized for an exempt purpose, such as helping the poor or disadvantaged.
- Private foundations. These usually are funded by a handful of donors with deep pockets. Private foundations often have a narrower focus than public charities, but they must meet the same requirements under 501(c)(3).
- Churches and religious organizations. These are also tax-exempt under IRS regulations.
- Social Clubs. These must meet the requirements under 501(c)(7). Social clubs must have limited membership and be organized for an exempt purpose. Examples of exempt social clubs include country clubs, hobby clubs, and college social or academic sororities and fraternities.
- Fraternal societies. They must satisfy requirements under 501(c)(10), such as having a fraternal purpose and devoting net earnings exclusively to fraternal, educational, religious, charitable, literary, or scientific purposes. Fraternal societies must also be domestic organizations.
Contact an Experienced Business Law Attorney
Many nonprofits and religious organizations have questions about how to maintain their tax-exempt status or how to obtain it in the first place. At Blasingame, Burch, Garrard & Ashley, P.C., we help entities navigate the web of IRS regulations. To schedule a consultation, please contact us today.
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