Why are non profits tax exempt

In opposition to corporate organizations that exist to return a profit for their owners and shareholders, Non Profits exist for the sole purpose of pursuing a common goal. For this reason, they are often protected from paying certain taxes that apply to corporations that are motivated by profits. Examples of common Non Profits that can apply for Tax Exempt status include universities, charitable organizations, social groups, and art-based groups. The reason that these types of groups are allowed to be Tax Exempt is that they often conduct activities that are inherently related to the public good, such as a university educating the population. However, there are certain guidelines that must be met for the group to receive Tax Exemption from the government.

In the United States, the Tax Exemption application process is done through the Internal Revenue Service, or IRS for short. This agency oversees all of the federal tax collection that is done in the country. Because there is no one person or group of owners that seek to receive profits from the activities of the group, they usually do not need to pay income tax to the federal government. Once the application has been submitted, the IRS will make a decision of whether the non profit organization will be allowed to be Tax Exempt. The IRS may make certain restrictions that prevent the group from abusing the Tax Exempt status. Such restrictions could include spending limits or that all purchases be clearly linked to the goal of the non profit group. Tax Exemption is a privilege and can be revoked if the guidelines are not followed.

If approved, the non profit organization will receive an authorization letter that identifies it as a Tax Exempt group. This is used for retail purchases and other business transactions that involve regulatory taxes, such as property tax and sales tax. However, this is often regulated by the individual local governments to decide whether the Tax Exemption applies to these taxes. In addition, most non profit groups will still need to pay income taxes on any income that is not aligned with the stated purpose of the organization. If the non profit organization fails to comply with these regulations, it could lose the Tax Exemption status and be required to pay taxes in the future.

Even though a non profit organization is Tax Exempt, it is still required to submit financial reports that document how much income was created by the group, both to federal and local authorities. This is frequently done using the IRS Form 990 that has been created for this exact purpose. Reporting procedures on the local level will differ depending on the state or municipality’s individual laws. Each state or local government will provide a resource center that clearly defines the responsibilities of the non profit organization to report earnings and retain their Tax Exempt status. Being Tax Exempt helps a group achieve their goals to improve the country or specific region.