Private foundations: Although they, too, are recognized under section 501(c)(3), these organizations may not participate in any legislative lobbying. The only exception to this rule is when pending legislation may have an impact on the foundation’s existence, tax-exempt status, powers, or duties, or on the deductibility of its contributions.
www.councilofnonprofits.org).
The situation with churches
Churches are in a category all by themselves. The IRS doesn’t require them to file for a tax exemption, nor does it require them to file annual reports. Some churches, however, do apply for an exemption because their social-service outreach programs often include anything from preschools to soup kitchens to affordable housing. These programs seek 501(c)(3) status so that they can more easily apply for foundation funding and government grants or contracts to help pay the costs of providing the services.
Taxes, taxes, taxes
Nonprofit organizations may be subject to unrelated business income tax, also known as UBIT. When a nonprofit makes $1,000 a year or more in gross income from a trade or business that’s regularly carried on and that’s unrelated to its exempt purpose, this income is taxable even if the proceeds support the organization. In addition, some corporate sponsorship funds may be subject to UBIT if they’re perceived by the IRS as advertising dollars. IRS Publication 598 tells you all you need to know about this subject; visit www.irs.gov to take a look at this publication.
Some states exempt some nonprofits from paying state sales and use taxes. Check the laws in your state to see whether your organization is exempt from paying these taxes. The same is true of property taxes — it depends on your local jurisdiction. Your nearest tax assessor can tell you whether you have to pay property taxes.
Nonprofit employees must, of course, pay income tax on their salaries and other taxable compensation.
Nonprofits owning for-profits
Nonprofits can own for-profit businesses. We don’t recommend it, because you’ll have enough on your plate, especially when you’re starting out, but it is possible. The business is subject to all regular taxes, just like all other for-profit businesses. Profits from the business may be distributed to the nonprofit, and the nonprofit must use them to further its goals and programs.
Very small organizations
If your nonprofit has less than $5,000 in annual revenues, it doesn’t need to apply for a tax exemption. You can even go a bit over $5,000 in a year if your average annual income over a 3-year period is less than $5,000. When your income averages more than that amount, however, you have 90 days following the close of your most recent tax year to file for a tax exemption.
www.irs.gov for the latest information about this requirement.
Nonprofit compensation
Nonprofit organizations have one common feature, regardless of their type: No board member, staff member, or other interested party can benefit from the earnings of a nonprofit. Instead, assets are forever dedicated to the purpose of the organization. If the organization dissolves, the nonprofit must transfer the assets to another organization that performs a similar function. Keep in mind that board members cannot be compensated by the nonprofit they govern. This would be considered a conflict of interest and could result in the nonprofit losing its tax-exempt status.
Comparing Nonprofits and For-Profits
Believing that nonprofit organizations have special advantages isn’t uncommon. And to some extent, it’s true. How many for-profit businesses, for example, get help from volunteers and generous donors? On the other hand, the advantages to owning your business exist, too. In this section, we discuss the similarities and differences between nonprofits and for-profits to help you decide which direction you should go.
How they’re alike
We start with the similarities between the nonprofits and for-profits because, believe it or not, there are several. For instance, consider the following statements:
Sound business practices are important to both organizations.
Strong financial oversight, including budgeting for revenue and expenses, is a key factor for both organizations.
Good planning based on good information is a critical factor in the success of both nonprofits and for-profits.
Management skills, the ability to communicate clearly, and attention to detail make a difference whether you’re working in a nonprofit or somewhere else.
A little bit of luck doesn’t hurt either type of organization.
A final similarity involves the term entrepreneur, which usually describes someone who starts a new business. But any person or group that sets out to establish a nonprofit organization is entrepreneurial as well. After all, you’re starting out on a path that may lead to great success, and you’ll assume some risks along the way. We hope that you won’t risk your house or your savings account to get a nonprofit going, but you may have uncertain income for a while.
How they differ
Although for-profits and nonprofits require similar professionalism and dedication from their leaders, they differ when it comes time to interpret their bottom lines and successes.