Every year as April 15 looms, taxpayers comb through receipts and scrutinize complicated forms to find ways to reduce their tax bill. Organizations pay taxes, too, of course. But if the IRS has granted them tax-exempt status, tax time can be less stressful. That doesn't mean it's easy to become a tax-exempt organization. The IRS has detailed rules and criteria to determine which groups qualify.
Charitable organizations are what most people think of when they consider tax exemption. These groups include public charities -- churches, hospitals, schools, research organizations -- and private foundations. To get tax-exempt status, it helps if your group has a charitable, educational or spiritual purpose. If your organization makes money that goes to its members or leadership, it probably isn't tax exempt. But if your group's mission goes beyond making a profit, consider the following ways to be tax exempt.
Agricultural and horticultural organizations can claim tax-exempt status. These include groups involved in forestry, raising livestock, harvesting crops or aquatic resources and cultivating ornamental plants.
Others that qualify:
- Nonprofit associations that educate people about agriculture horticulture
- Groups that test soil and share the results with community members
- Organizations that exhibit livestock or farm products
An organization can even throw a rodeo and retain its tax-exempt status if the event's purpose is to educate the public about agriculture. Horse racing, on the other hand, is not considered an agricultural pursuit.
Churches and religious organizations are generally tax exempt. In this context, "church" means any place of worship, including mosques and synagogues. Religious organizations include ministries and other organizations involved in the promotion or study of religion. Churches that meet the requirements of Internal Revenue Code section 501(c)(3) aren't required to apply for tax-exempt status, but many still do. The reason? Tax-exempt status lets people know that financial contributions they make to the church are tax-deductible. Churches may become involved in public policy, but they have to be careful. A church that focuses on lobbying (influencing legislation) or becomes involved in a political campaign may lose its tax-exempt status.
Fraternal orders, societies and associations can apply to be tax exempt. The IRS defines a fraternal organization as one in which members have a common tie or pursue a common goal. The IRS also requires that the group be organized under a lodge system. This means a parent organization and multiple self-governed subgroups (or lodges). Qualifying fraternal organizations may or may not offer their members benefits such as life or health insurance. This depends on the section of the tax code under which they are exempt. Beneficiary fraternal organizations provide such benefits, while domestic organizations divert their earnings to charitable, fraternal or religious causes. If a group isn't eligible for exemption as a fraternal organization, it may be eligible in another category, such as a social club.
Tax-exempt educational organizations include a wide range of groups. Primary and secondary schools, colleges and universities are the most obvious candidates. But credit counseling agencies, museums and zoos may also be eligible. An organization must show the IRS exactly how it provides educational activities. This may come in the form of classroom instruction, a lecture series, correspondence courses or museums tours. But organizations claiming to be educational must meet certain requirements. The IRS may decide an organization's method is not sufficiently educational. For example, a group that presents viewpoints not supported by facts, or informed more by emotion than by evidence, may not be tax exempt as an educational organization.
Social welfare organizations usually qualify for exemption. These are defined as organizations created to contribute to the well-being of a community. They can take on a range of functions and forms, including:
- An association of volunteer firefighters
- A membership organization that a real-estate developer creates to maintain common areas for residents of a housing development
- An organization that holds annual festivities celebrating regional traditions
- An organization that supervises the operation of an airport that serves the public in an area with no other airport
Labor organizations are generally eligible for tax exemption if they meet the IRS's criteria. A labor organization must be an association of workers collaboratively promoting their interests. Through collective bargaining with employers, these organizations advocate for a range of improvements. These may include better working conditions, higher wages, healthcare benefits and accident benefits. Activities that the IRS considers appropriate for labor organizations include producing a newspaper covering labor issues, maintaining a legal defense fund for law enforcement officers or establishing a union strike and lockout fund.
For the purposes of tax exemption, a social club must have a limited number of members who meet regularly for pleasure and recreation. It also must be nondiscriminatory regarding race and color. Issues of religion, however, are trickier. A social club may be tax exempt even if it restricts membership to people of a particular religion, if that shared religion is the club's main purpose. Examples of social clubs include:
- Country clubs
- Amateur hunting and fishing clubs
- Dinner clubs that provide a meeting place for members
- Clubs organized around particular hobbies
For tax-exemption purposes, a veterans' organization is a group of members of the U.S. armed forces. At least 75 percent of the organization must be made up of past or present members of the armed forces. A veterans' organization's purpose must fall within the IRS's list of approved functions. Eligible activities include:
- Assisting disabled veterans or their dependents, widows or orphans
- Providing care to hospitalized veterans
- Supporting programs that memorialize deceased veterans
- Providing recreational activities for veterans
- Offering insurance benefits for veterans or their dependents
- Participating in activities the IRS deems "of a patriotic nature"
Organizations conducting scientific research can qualify for tax exemption if the research is carried out in the public interest. This means they must make the research results -- including patents, processes and formulas -- available to the general public. Activities that qualify under this exemption would include conducting research to discover the cure for a disease, supporting the scientific education of college or university students, and helping a community attract a new industry to the area. Not included are normal activities related to running a commercial or industrial concern, such as inspection or testing of materials.
Tax exemption is granted to trade associations that are groups of people with a common business interest. Trade associations don't do business for profit or perform services. Instead, to qualify as a trade association, the organization must be involved in promoting the common interest of its members. Included in this category are chambers of commerce, boards of trade, and, perhaps surprisingly, professional football leagues like the NFL. Trade association activities include:
- Promoting higher standards within an industry
- Producing a trade publication
- Encouraging the public to use the goods and services of a particular industry
As you can see, there are a variety of ways to be tax exempt but the parameters for tax exempt businesses and organizations are well-defined.
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- "Types of Tax-Exempt Organizations." Internal Revenue Service. (Oct. 3, 2010.)http://www.irs.gov/charities/content/0,,id=96931,00.html
- "Tax-Exempt Status for Your Organization." Publication 557, 6/2008. Internal Revenue Service. (Oct. 3, 2010.)http://www.irs.gov/publications/p557/index.html
- "Other Tax-Exempt Organizations." Internal Revenue Service. 2010.http://www.irs.ustreas.gov/charities/article/0,,id=96184,00.html