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What are the Most Common Not-For-Profit Tax Issues?

By Heather Phillips
Updated May 17, 2024
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In the United States, the most common not-for-profit tax issues center on achieving tax-exempt status, and on the rules for maintaining it. A not-for-profit business must have a certain structure and be charitable, educational, scientific, or literary in nature. The business must go through a review process with the Internal Revenue Service (IRS) to achieve tax-exempt standing, and rules need to be followed to preserve that standing. For instance, a not-for-profit organization cannot lobby for political candidates without following stringent rules and retain its tax-exempt classification.

Not-for-profit tax law maintains that such a business must be structured in a similar manner to a corporation. It needs a board of directors, who determine the policy of the organization, as well as officers — such as a president, treasurer, and secretary — to supervise the business’s operations. Often, it also has employees to carry out the daily work. A not-for-profit company cannot have shareholders, however, because private individuals cannot obtain financial gain from one.

Employees can be compensated for their work, but their pay needs to be commensurate with the work performed. There is no opportunity for profit-sharing within a non-profit business because whatever excess funds are generated must be used to further the mission of the organization. Excessive employee compensation can actually be subject to excise tax.

Some other rules having an impact on not-for-profit tax have to do with recognizing contributions from donors. If a non-profit solicits donations, any gift over $250.00 US Dollars (USD) must be recognized in writing. If a donation is solicited, and the non-profit gives something to the donor in return, then the value of what is given by the organization must also be recognized in writing. This is because such trade can reduce the amount a donor may deduct from his or her taxes.

Another not-for-profit tax issue is that a non-profit cannot make substantial earnings from unrelated activities that are not central to the purpose of the organization. An example of this might be consulting services given by specialists within a non-profit. If an activity starts to resemble a for-profit business, it could jeopardize the organization’s tax-exempt standing.

In addition, not-for-profit tax standing might be affected by individual state and local rules. Just because an organization is, federally, considered tax-exempt, does not mean that it is automatically exempt from state or local taxes. It is important that a not-for-profit business to be aware of regional rules that may affect its status.

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