A non-profit organization or foundation (NPO), also known as a non-business entity or not-for-profit organization, is dedicated to furthering a particular social cause or advocating for a shared point of view. The term is meant to describe a non-profit organization not operating primarily to make a profit. Instead, it is set up to achieve or help a cause the institution believes in. It is a business/corporation that has been given tax-exempt status by the Internal Revenue Service (IRS) because it further a religious, scientific, charitable, educational, literary, public safety or cruelty-prevention mission or area of work.
A non-profit’s tax requirements are complicated, often dictated by their activities, business purpose, state or city’s needs and more. There are 27 different types of non-profits in the federal tax code, and some aren’t exempt from taxes. These cases, however, are not familiar since most non-profits receive some tax benefits.
Which non-profits are exempted from property taxes?
People often use the words’ non-profit” and ”tax-exempt” interchangeably. Not all non-profits have a purpose and activity that entitles them to an exemption. The use of the property determines the exemption. The fact that a non-profit is recognized by the Internal Revenue Service as described in Section 501(c)(3) of the Internal Revenue Code is generally not the determining factor. In some places, it is not even relevant to the analysis. Typical organizations receiving property tax exemption are schools, churches, cemeteries, hospitals, social service agencies, character-building organizations, nursing homes, homes for the ageing, museums, performing arts facilities, and public meeting halls. Beyond the start-up phase, non-profits must keep a close eye on their financial and accounting practices or could strip them of their exempt status.
The critical factor in maintaining an organizations’ exemption from property taxes lies in the group’s use of the structure. If the property or any portion of it is not used to promote the non-profit organization’s mission, it is liable for property taxes. For instance, if the group owns a property but leases part of that property to a for-profit business, the group is responsible for property taxes on the leased portion of the property.
Different Tax-Exempt Organisations
There are different tax-exempt organizations in other sections of the tax code:
- Section 501(c)(3): Public charities (also known as charitable non-profits) and private foundations. The tax code considers churches and religious organizations (which the IRS defines to include mosques, synagogues, temples, and other houses of worship) to be public charities.
- Section 501(c)(4): Social welfare organizations, homeowners’ associations, and volunteer fire companies
- Section 501(c)(5): Labour unions
- Section 501(c)(6): Chambers of commerce
- Section 501(k): Child care organizations
Property Tax Assessment Law
Non-profit organizations apply to the Internal Revenue Service to seek 501(c)(3) status. If an organization receives a federal 501(c)(3) determination letter from the IRS, it is exempt from state corporate income tax liability.
The property tax bill is based on the assessed value of the property, any exemptions for which it qualifies, and a property tax rate. However, these exemptions are not automatically based on 501(c)(3) determination and depend on multiple factors besides the tax code.
The law states that “Institutions of purely public charity that are exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code are exempt if they meet the requirements of this subdivision.”
Requirements to be Exempt from Tax
To determine whether the organization is exempted from property taxes, it must meet the following requirements:
- Whether the stated purpose of the organization is to be helpful to others without the immediate expectation of material reward?
- Whether the institution of public charity is supported by material donations, gifts, or government grants for services to the public in whole or in part?
- Whether a material number of recipients of the charity receive benefits or services at reduced or no cost, or whether the organization provides services to the public that alleviate burdens or responsibilities that the government would otherwise bear?
- Whether the income received, including material gifts and donations, produces a profit to the charitable institution that is not distributed to private interests?
- Whether the beneficiaries of the charity are restricted or unrestricted, and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives?
- Whether dividends, in form or substance or assets upon dissolution, are not available to private interests?
Payments in place of Taxes
If the organization becomes eligible to be exempted from the property and other taxes, payments in place of taxes have to be made to compensate the taxes. These payments are termed payments instead of taxes or PILOTs. For not-for-profit entities (NFPs), PILOT are amounts paid to a state or local government in place of taxes, most commonly property taxes. At issue are the vast amounts of land owned by universities, hospitals, churches, and other NFPs. The methods of compensation vary from place to place.
Local governments of some places provide services to non-profits even though they don’t pay property taxes. Because of non-profits’ tax-exempt status, homeowners and for-profit businesses foot the bill for providing benefits such as streetlights and law enforcement to the non-profit organizations in their community. To ease the burden on taxpayers, some places require all property owners, including non-profits, to make payments in lieu of taxes. Other municipalities impose fees for specific services such as fire protection or snow removal. PILOT is voluntary for NFPs in the majority of the places.
What taxes do non-profits pay?
Non-profit organizations are not exempt from paying all taxes. The IRS reports that organizations that hire employees must pay payroll and other taxes on their team member’s wages. Similarly, non-profit organizations that operate unrelated business activities that generate income must pay taxes on those activities’ income. While most places won’t require non-profit organizations to pay the state income tax, some have specific fees or special requirements to prove your tax-exempt status.
Check the rules of IRS in details in respect to charities and non-profits.