In the tax world, the terms “not-for-profit” and “tax-exempt” are often used interchangeably, but the terms actually mean different things.
The difference is similar to the difference between S-corporation, C-corporation, and the word “corporation.” S-corp and C-corp are tax terms; “corporation” is a legal term.
A similar concept applies to not-for-profit and tax-exempt.
Not-for-profit is a legal term.
When a not-for-profit incorporates, it specifies that it is a not-for-profit. This has meaning at the state level. The requirements, and benefits, of being a not-for-profit vary from state-to-state.
Tax-exempt is a federal tax term. When a not-for-profit is formed at the state level, it is NOT automatically tax-exempt at the federal level — it must file for tax-exempt status with the IRS.
In other words, it’s possible for a not-for-profit to NOT be tax-exempt.
MAKING YOUR HEAD HURT
This is where I’ve seen a lot of organizations fall off the wagon.
In some cases, they assume that filing their articles of incorporation with the state (saying they’re a not-for-profit) takes care of everything.
In other cases, the organization has the foresight to file for tax-exempt status with the IRS, but the 990s don’t get filed and the IRS revokes the organization’s tax-exempt status.
In either case, if a not-for-profit doesn’t have tax-exempt status with the IRS … the organization is technically a taxable entity. Since most not-for-profits are organized as a corporation, the organization would technically be required to file a corporate tax return and possibly pay corporate income tax.
There are ways to fix these problems. An organization can retroactively file for tax-exempt status if they failed to do so from the beginning. An organization can also file to get its tax-exempt status back if they fail to file their 990s. But these are costly fixes.
As with most things relating to compliance, it’s far better and more cost-effective to do things properly from the start.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”