Tax
II. C. Principle–501(c)(3) Status for the Charitable Nonprofit
After completion of incorporation, creation of the trust with an indenture, or adoption of the articles of organization of an unincorporated association, the board should seek tax treatment consistent with its charitable purposes under Internal Revenue Code 501(c)(3) from the U.S. Internal Revenue Service, and then faithfully and successfully conduct the affairs of the nonprofit entity within that Code sections’ provisions.
Practices
- Application should be made to the U.S. International Revenue Service for federal income exempt status on IRS Form 1023 available on the IRS Web site. The nonprofit should also apply for an employer identification number (EIN) with form SS-4 which is also available on the IRS Web site. This EIN number is required even if the charitable nonprofit is not an employer.
The Law of Tax Exempt Organizations (2007), by Bruce Hopkins.
Frequently Asked Questions about Tax
No. When one buys a raffle ticket one is buying the chance to win the item up for raffle. Since the fair market value of the chance to win the item up for raffle is equal to the price of the ticket, the transaction is merely a purchase; therefore the purchaser has not made a donation.
The general rule is that unless a tax treaty applies, your donations are only tax deductible if you make your donations to a charitable organization that is created or organized under United States law. There are more complex rules if the gift is made through a private foundation.
A donor should not attach the written acknowledgement from the recipient organization to the donor's individual income tax return. Instead the donor must keep the written acknowledgement to substantiate the contribution.
Tax law provides that it can be a state or local government unit. Income earned by a state, a political subdivision of a state, or an integral part of a state or political subdivision of a state is generally not taxable in the absence of specific statutory authorization for taxing such income. Rev. Rul. 87-2, 1987-2 IRB 4, 1987-1 C.B. 18. The IRS guidelines quoted above, Rev. Proc. 95-48, refer to government affiliate status for a “wholly owned instrumentality of a state or a political subdivision thereof, for employment tax purposes.”
In order to be considered tax exempt under IRC 501(c)(3) your organization's purpose must be one of the following: religious, charitable, scientific, testing for public safety, literary, educational, amateur sports, prevention of cruelty to children, prevention of cruelty to animals, or conservation and environmental activities. If your organization is going to be an Iowa Nonprofit Corporation, the purpose must also be lawful according to Iowa Code 504.301.
Tax exemption under IRS code §501(c)(3) has two primary benefits: 1) the donor making a donation to the nonprofit gets a tax deduction, and 2) there is no income tax on related earned income. This is true for purposes of federal income tax and Iowa income tax. Other benefits include the ability to issue tax-exempt bonds for capital projects, qualification for tax-exempt retirement plans (403(b)), and special postal rates.
