by JOHN STYLIANOU, ACCOUNTANT
If you’re an officer or on the board of a community organization, you may wonder about the tax requirements that apply to your group. Generally an organization will not owe taxes if two things are true:
It has registered as an exempt nonprofit organization with the IRS, and
It has no business income from activities unrelated to its exempt purpose.
Registration is quite straightforward. The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group’s existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000 don’t even have to register to be considered exempt.
More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization’s exempt purpose.
Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn’t pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Generally, rents from leasing out real property, interest income, and dividends are not subject to tax.
Once it’s registered, an exempt organization will have to file an annual information return unless its yearly gross receipts are less than $25,000. Just as with a tax return, there are penalties for filing late or failing to file.
For assistance with any of your tax concerns, contact our office.