Frequently Asked Questions About Nonprofits And Charitable Organizations

Navigating tax status can be tricky, especially for organizations crossing state and national borders. Gonzalo Law can help nonprofit organizations handle complex legal matters of any shape or size.

Q: What is the difference between nonprofit and tax-exempt status?

A: Nonprofit status is a state law concept. Nonprofit status may make an organization eligible for certain benefits, such as state sales, property, and income tax exemptions. Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code.

You can contact the internal revenue service for further information or click on our Contact Us tab for legal advice.

Q: How can I legally maximize the revenues from my tax-exempt organization while staying consistent with state and federal laws?

A: Legal counsel will work with you to complete a comprehensive analysis of the compensation and organizational structures of your tax-exempt organization. This analysis is completed in conjunction with a review of the U.S. tax code, federal and local statutes, case law, and best financial practices for tax-exempt organizations. When this analysis of your tax-exempt organization is complete, legal counsel will provide a detailed report of whether your organization is compliant under local and federal law, as well as the best financial practices for your nonprofit.

Nonprofits provide public services that are considered valuable and important to society. As your nonprofit begins to maximize its revenues, you should note that the government offers tax exemption as an indirect subsidy, in exchange for valuable public benefits. If your organization is tax-exempt, it will fall under the IRS tax code 501(c). This exempts the organization from paying federal, state, and local taxes. Furthermore, donors can deduct their gifts to your organization from their federal and state tax returns. However, tax-exemption excludes employment withholding taxes, Social Security, and some state and local taxes. Most Ohio municipalities impose an income tax. As such, it is vital to ensure that you have maximized your revenues most efficiently while managing and growing your tax-exempt organization.

Click on our Contact Us tab to find out more about the tax-exempt entity status.

Q: Do I need a tax-exempt number for my organization?

A: No. Unlike some states that issue numbers to organizations to indicate that these organizations are exempt from state sales taxes, the IRS does not issue numbers specifically for exempt organizations. While the Internal Revenue Service does issue Employer Identification Numbers (EINs), these are merely a unique identifier, similar to a Social Security number for an individual. Applying for and receiving an EIN says nothing about the organization’s tax status; however, your organization needs an EIN to apply for tax exemption.

Q: What employment taxes must tax-exempt organizations pay?

A: As confirmed by the IRS, tax-exempt organizations have important responsibilities as employers while operating and managing their activities. Before an organization becomes an employer and hires employees, it needs a federal Employer Identification Number (EIN). If the organization has employees, it is responsible for several federal, state, and local taxes. As an employer, the organization must withhold certain taxes from employees’ paychecks. Employment taxes include the following:

• Federal income tax withholding (FITW)
• Federal Insurance Contributions Act (FICA)
• Federal Unemployment Tax Act (FUTA)

Q: Can our organization collect donations while our application is processing? 

A: Yes, it can. Yet, while your application is processing you must inform donors that your application is processing and if rejected, their item will not be tax-deductible. Additionally, during the application process and wait time, businesses should carry out their record-keeping just like any recognized tax-exempt charity would. In addition, once the IRS approves your exemption application, exempt status is recognized back to the date the organization was created. Nonprofits must apply for 501(c)(3) status within three months of their second anniversary of incorporation in the state in order to receive these benefits.

Q: Can I be the executive director and on the board of directors? 

A: This is not ideal yet may be necessary for many nonprofits just beginning operations. The goal, however, should be to move towards having directors on your board that are separate from the staff. The staff will run the organization. The board will lend their expertise and influence to your organization. When the board and staff are separate, this will prevent any conflict of interest concerns in your organization. The Executive Director, however, can always be permitted to sit in as a guest at the Board meetings, if needed, yet should not be allotted rights to vote.

Q: Can our nonprofit invest in the stock market?  If so, are there rules to doing so? 

A: Yes, you can invest in the stock market, yet the money earned must still go towards the charitable purpose of the organization. Nonprofits must comply with the internal revenue service guidelines to maintain their 501(c)(3) tax-exempt status and avoid penalties. If they follow these guidelines, tax-exempt nonprofits can invest in stocks without paying any taxes on stock dividends or gains on sales. Otherwise, the IRS may tax the nonprofit’s management and others who have benefited from investing in the stock market. It may be beneficial for your organization to create an investment plan detailing your organization’s investment guidelines. Further, how investment earnings will be distributed should be detailed in this plan to avoid penalties. Talk with legal counsel so that the totality of the circumstances can be considered.

Q: If I am dissolving a nonprofit, are there specific steps I must take for dissolution?

A: Absolutely! There are steps to transfer personal property, real estate, assets, and more that must be done in accordance with federal and state law. First, a vote must be taken for dissolution. However, if no voting members exist, your organization can move forward with the process. Second, Form 990 must be filed to declare the dissolution for tax purposes. Third, articles of dissolution must be filed in order to present to the IRS after Form 990 is processed. Finally, once those documents have been filed, there might be state-specific documentation needed. Talk with your legal counsel to discuss additional considerations. You may also contact your State Attorney General for more information. The dissolution process generally takes 30-60 days once all documents are prepared and ready to be processed.

Learn More About Nonprofits And Charitable Organizations

Have more questions about nonprofits and tax-exempt organizations? The experienced business law attorneys of Gonzalo Law can help you find answers. Call our firm at 352-389-5577 or send us an email to schedule your first appointment.