Whether you work for a school or college, hospital, church or other 501(c)(3 organization, if you’re involved with a non-profit, you’ll want to make the most of your tax-exempt status. After all, tax exemptions can save your organization a substantial amount of money. Let’s look at a few examples of tax-exempt benefits so you’ll be aware of the perks – and implications – of this coveted benefit.
1. Fewer state and federal taxes
The most important benefit of tax-exempt status comes at tax time — your organization pays less in both federal and state taxes. In many cases, you won’t need to pay the federal corporate income tax or unemployment tax. Keep in mind that the income tax exemption only applies to income that’s directly related to the nonprofit’s purpose; unrelated income is subject to tax.
Every state sets its own tax rules for 501(c)(3) organizations. Many states offer exemptions for sales tax, property tax, and corporate income tax. You may also be able to avoid use, excise, and franchise taxes.
2. Sales tax exemptions (in some cases)
Many states offer nonprofits an exemption from sales tax, which means that your organization can save thousands on the goods and services you purchase (from computers and office supplies to catering services).
The laws vary, so it’s important to understand the rules before you start purchasing. For example, California offers exemptions for a few specific purchases, including certain types of food. In Connecticut, qualifying nonprofits enjoy a broad sales tax exemption.
The way you claim the sales tax exemption varies, too. Some states, including Michigan and Florida, require you to present a certificate of exemption. In states such as Connecticut, you can simply present a copy of your IRS determination letter.
3. Ability to accept tax-deductible donations
Most nonprofits rely on donations. If your organization has a tax-exempt status, donations are tax-deductible. That means your donors can deduct their contributions from their income, which means they’ll pay less in taxes. This perk can motivate people to donate, particularly if they’re actively looking to maximize write-offs. Depending on the donor’s status, they might be able to deduct charitable contributions up to 50% of their adjusted gross income.
Are you planning to solicit funds from businesses? Keep in mind that corporations can also make tax-deductible charitable contributions. Obtaining your 501(c)(3) status opens up the organization to high-dollar donations.
4. Increased grant availability
If you run a tax-exempt 501(c)(3) organization, you’re qualified for a wide range of grants. This can make it easier to find funding, especially when donations are down. Many foundations, government agencies, and funding sources give money to nonprofits because of the tax benefits. Others are required to donate a specific percentage of their assets to qualified organizations each year.
5. Discounted postage rates
If your nonprofit relies on direct mail to communicate with donors and volunteers about fundraisers and holiday parties, postage costs can add up. As a tax-exempt organization, you could qualify for special postage pricing for domestic mailings. Once you’re approved by the U.S. Postal Service, you can save a significant amount of money.
6. Freedom to lobby
Nonprofits often work for change at the ground level. As a tax-exempt 501(c)(3), your organization is also free to lobby government entities to influence legislation. If you work in environmental cleanup, you might ask legislators to pass laws that protect natural resources; if you work with underserved populations, you could advocate for social programs. Keep in mind that lobbying should be limited; if it makes up a substantial part of your activities, the IRS could strip your tax-exempt status.
Tips for maximizing the benefits of tax-exempt status
Pay attention to tax deadlines
Once your organization is registered as a 501(c)(3), it’s important to check IRS and state rules. To get tax-exempt status, you must apply to the IRS to recognize the exemption. As long as you do so within 27 months, your tax exemption will be active from the date the 501(c)(3) was created. It’s a good idea to apply even if you’re not required to; it’s an easy way to get clarification and proof of your tax-exempt status from the IRS.
State rules vary. In some states, 501(c)(3) organizations are automatically given a tax-exempt status. In others, all you need to do is notify the state. A few states require you to apply separately for tax exemptions.
Provide receipts for donations
Help your donors maximize their tax deductions by providing receipts for every donation. Each receipt should include the donor’s name, the donation amount, and the date. If the person donated goods, write a description and note the value. Make sure to include your organization’s name, a statement of its registered 501(c)(3) status, and the signature of an employee. If the donor received something in return, explain its value. Complete, accurate records make the donor’s life easier at tax time, which encourages them to contribute in the future.
Minimize paperwork by using non-profit-friendly vendors
As you choose which vendors to use, find out what their process is for handling the paperwork for your tax-exempt status. For instance, if your nonprofit hosts catered board meetings or events, a catering partner can reduce administrative overhead and ensure you’re maximizing the benefits of tax-exempt status. With a service such as ezCater, you only need to file tax-exempt paperwork once — then, you can order from more than 100,000 restaurants across the United States. We’ll apply the state tax certificate automatically based on the delivery address.
Are you ready to streamline your nonprofit’s planning process? Contact us to learn about tax-exempt catering.