A nonprofit organization is a business that has been granted tax-exempt status by the Internal Revenue Service (IRS) because it furthers a social cause and provides a public benefit. Donations made to a nonprofit organization are typically tax-deductible to individuals and businesses that make them, and the nonprofit itself pays no tax on the received donations or on any other money earned through fundraising activities. Nonprofit organizations are sometimes called NPOs or 501(c)(3) organizations based on the section of the tax code that permits them to operate.
Qualifications for NPO Status
A nonprofit designation and tax-exempt status are given only to organizations that further religious, scientific, charitable, educational, literary, public safety or cruelty-prevention causes or purposes. Examples of nonprofit organizations include hospitals, universities, national charities, churches, and foundations.
A nonprofit must serve the public in some way, whether through the offering of goods, services, or a combination of the two. They’re also required to make financial and operating information public so that donors can be informed about how—and how well—their contributions have been used. Nonprofits may also exist to collect income to dispense to other qualifying charities.
Before it can receive a tax exemption, an organization needs to request 501(c)(3) status from the IRS. Once registered and running, the organization has to maintain compliance with the appropriate state agency that regulates charitable organizations. This often requires a dedicated CIO and accounting team.
NPOs cannot be political, which helps explain why so many of them actively seek a non-partisan tone in their communications. Organizations seeking 501(c)(3) status must state explicitly in their organizing papers that they will not participate in any political campaign on the behalf of any candidate or make expenditures for political purposes. There are 501(c) groups that can engage in these activities, but not 501(c)(3) organizations.
Operating Rules for NPO Status
While some not-for-profit organizations use only volunteer labor, many large or even medium-size non-profits are likely to require a staff of paid full-time employees, managers, and directors. Despite having special tax advantages in other respects, nonprofits typically must pay employment taxes and abide by state and federal workplace rules in the same way as for-profit organizations.
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