Non-Profit Organizations

  July 27, 2023

While most businesses aim to make a profit for their owners and interested parties, a non-profit organization is an entity whose goal is to earn money for public or social benefit. This is not to be confused with a not-for-profit who does not have a goal of raising any revenue whatsoever. Investor-owned businesses provide dividends, lower costs, and other comparable benefits straight to their members. However, non-profit organizations are known to put their mission first and to be accountable and honest for all who have investments into the entity. Characteristics that differentiate a non-profit organization from a standard business are:

  • An entity that contributes resources from their resource providers who are not expecting a return of monetary or trade value
  • An entity that has a goal other than providing resources (goods or services) at a profit
  • Absence of ownership interests

Internal Revenue Service Defines Non-Profits

The IRS defines non-profits as tax exempt organizations from income taxes under Section 501. Section 501 includes charitable, educational, and religious entities as well as civic leagues, social clubs, and other groups. However, non-profits are not automatically tax-exempt. They must apply to and be accepted by the IRS. Groups must also operate and continuously meet the same requirements to maintain their status. Most churches automatically qualify for this status under IRC section 501(c)(3), however, to protect their donors when audited, they still apply.

All tax-exempt organizations are prohibited from assisting political candidates using any asset they have. They must also follow all other requirements that are a part of the Internal Revenue Code, Regulations and Form 990 Information Returns – even if not filing the form isn’t required.

Under 501(c), there are major classifications for tax exempt organizations. These include, but are not limited to:

  • 501(c)(3) – Organizations that are operated for religious, charitable, scientific, testing for public safety, literary, education or other specified purposes.
  • 501(c)(4) – Organizations that promote social welfare such as civic leagues and those that promote community welfare with charitable, educational, and recreational activities.
  • 501(c)(5) – Organizations that are labor, agricultural, and/or horticultural in nature that provide educational activities that improve productivity and efficiency in the labor fields.
  • 501(c)(6) – Organizations that are classified as business leagues, chambers of commerce, real estate boards, and others whose goal is to improve business conditions.
  • 501(c)(7) – Organizations that have a social, recreation, and pleasure objective for their community such as social and recreational clubs.

Each exempt organization has a five-stage life cycle. Each stage has required steps that need to be taken to ensure that the organization is meeting the standard of the IRS to be a tax-exempt organization.

  • Starting out – Creating the organization under the state laws, acquiring the employer identification number, and identifying the federal tax classification.
  • Applying for Exemption – Submitting the application form to the IRS
  • Required Filings – Annual returns, unrelated business income tax filings, miscellaneous forms such as Form 8976, reports, and other notices.
  • Ongoing Compliance – Includes steps taken to avoid losing their tax-exempt status via compliance issues
  • Significant Events – Termination procedures, audits, and private letter rulings may occur.

Examples of Nonprofit Entities

  • Colleges and Universities
  • Country Clubs
  • Elementary and Secondary Schools
  • Labor Unions
  • Libraries
  • Cultural Organizations
  • Political Parties
  • Community Foundations
  • Religious Organizations
  • Research Organizations
  • Trade Associations
  • Welfare Organizations
  • Zoological Societies

Voluntary Health and Welfare Entities

Health and welfare entities provide services and goods that assist in guiding and training the public that follow their mission statement. These types of non-profit groups can also assist in finding cures and helping people who have diseases such as cancer, diabetes, and muscular dystrophy. Examples of this kind of organization include:

  • Boy Scouts
  • Boys Club
  • Girls Club
  • Goodwill Industries
  • Red Cross
  • Salvation Army
  • United Way

Non-Profit organizations help their communities thrive. It is important to understand what they are, how they get started, and how to help keep them going. However, there are many steps that are taken to create and maintain these groups. That’s why it is important to contact your accountant to stay on the correct path so the organization can focus on their mission without any interference. Kislay Shah is experienced in non-profit organizations and is diligent in maintaining their group’s efforts. You can reach Shah at kislay@shahcpaus.com or call 646-328-1326.