703 845 5900
Boris Foxman. August 31st 2020
In forming a nonprofit corporation, there is an extra step necessary that creating a regular corporation doesn’t need. Nonprofits are tax-exempt at both the federal and state level. Here are the basic steps needed to set up your nonprofit organization:
Each kind of nonprofit requires a specific form filed with the IRS for tax exempt status.
It may take several months for the IRS to get back to you after you submit your tax exempt paperwork, and they may come back to you for more information, but soon you’ll receive the letter for which you were waiting. Then you can file for tax-exempt status in your state.
Most nonprofits are 501(c)(3) charitable organizations, or public charities, such as animal welfare organizations, food banks, museums, and most private foundations. Donations to these organizations are tax-deductible for the donor. The nonprofit itself is exempt from paying income tax on donations that are used to fulfill their mission. Social welfare organizations are considered 501(c)(4) nonprofits and are created to promote the common good and general welfare of the community, for example, “by bringing about civic betterments and social improvements.”
The two biggest differences between 501(c)(3) public charities and 501(c)(4) social welfare organizations are whether donations are tax-deductible and which types are allowed to engage in political activities. Contributions to 501(c)(3)s can be tax-deductible, but donations to 501(c)(4)s are never deductible. Since both are nonprofits, they don’t pay income tax on money used in activities related to their mission; they would pay tax on income used for any other business activity.
Because contributions to Section 501(c)(3) organizations are tax-deductible, there are limits to their involvement in politics. They must not:
These restrictions apply to all political campaigns at all levels including federal, state, and local races, and even some elections in foreign countries. Any public charity violating these rules can lose its tax-exempt status.
In contrast, because contributions to a social welfare organization are not tax-deductible, these nonprofits do not have these restrictions. They may engage in politics, including unlimited lobbying, as long as it supports their social welfare purpose. For example, an organization created to help improve public health could spend its money lobbying Congress to provide more funding for public health clinics. As a result of a ruling by the United States Supreme Court, 501(c)(4) nonprofits can spend up to half of their general budget and any donations to them to support or oppose candidates for any election as long as doing so advances the organization’s social welfare purpose; they just cannot give the money directly to the candidate.