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An organization can be not-for-profit, yet still be subject to federal income taxes. Section 501(c)(3) of the Internal Revenue Code specifies which organizations qualify for tax-exempt status.
Creating a Tax-Exempt Organization

The following types of organizations are those that qualify: Religious, charitable, testing for public safety, organizations that foster amateur sports competition, scientific, literary, educational, or aid in the prevention of cruelty to children or animals. To qualify, these organizations must not be organized for a profit and must have an exempt purpose.

Section 501(c)(3) has many advantages for a nonprofit organization. In addition to obtaining exemption from federal income tax, the other advantages are:
  • Assurance to donors of deductibility of contributions
  • Exemption from certain state taxes
  • Exemption from certain Federal excise taxes
  • Exemption from taxation on purchases of goods
  • Nonprofit mailing privileges
There are also some disadvantages:
  • Continuous planning to maintain the status of tax-exemption
  • Records of meetings are open to the public, not just the membership

While it is most certainly advantageous for all nonprofit organizations to request tax-exempt status, those organizations that have gross receipts each year in excess of $5,000 are required to apply for tax-exempt status.

The IRS form used to apply for tax-exempt status is Form 1023. Prior to filing, an organization must have some form of business entity, most commonly, a corporation. This requires registration with the Secretary of State, approving bylaws and obtaining a federal identification number.

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