So, you want to be tax-exempt? The benefits are plain to see: of course you don’t pay taxes but you also open up the door to a whole new world of potential donors.
Why? Because most corporate and private donors want a tax deduction for their charitable giving. They won’t get that deduction unless the IRS officially recognizes the benefactor of their good will as having tax-exempt status.
This is all laid out clearly in IRS Publication 557, but since the IRS isn’t known for explaining things in easy-to-understand language, we thought we’d give you a quick primer here. What follows is a short break-down of the six different types of tax-exempt organizations as defined by the IRS.
What the IRS Has to Say About Different Types of Tax-Exempt Organizations
1. Charitable Organizations. Tax-exempt status isn’t just for churches and Boy Scout troops, you know. The most obvious types are Charitable Organizations. These are organizations which benefit the greater good of humanity and the earth. Think of the Salvation Army.
And it doesn’t have to be anything as glamorous and recognizable as that. Let’s say you help out local women in your community who are getting ready to job interviews. Maybe you offer interview coaching sessions for free, or a suit donation program so they can look presentable when they interview. You may even run a thrift shop with those suits, and put the income towards rent, upkeep, salespeople or whatever. How about the rest? Unless you’re tax-exempt, you’ll pay income tax on it.
2. Scientific Organizations. Are you fixated on finding a natural solution for lowering blood pressure? Set up a lab and start conducting your experiments but you’ll probably want a few donations along the way to help with expenses (beakers and test tubes are expensive).
Well, donations will flow much more easily when you’re tax-exempt. If all your profits (if there are any) go towards your research then you may qualify.
3. Literary Organizations. The IRS likes to support the Arts, too. Do you run a group that supports reading for kids? Or how about promoting the writing of poetry? As long as you’re not operating for the sole purpose of turning a profit and you’re benefiting society in some way, tax-exempt status might be worth looking into.
4. Educational Organizations. If you want to educate a sector of the population on something, and it’s somehow worthy, then you may be eligible for tax-exempt status, too. But you really have to have good intentions in mind, or else the IRS will see right through you. “Educating” the public on why they should join your pyramid scheme is of course not going to fly!
5. Public Safety. The world needs these types of organizations…they protect us from pollution, road hazards, pesticides, lead paint, and just about every danger known to man, and caused by man too. These types of organizations act as public watchdogs on corporations, the government, and the rest of us as well.
6. Animals and Children. Groups formed to protect the welfare of animals and children are much needed, and the IRS supports this with tax-exempt status, if you qualify.
If you think you qualify for tax-exempt status then your next step should be to get more info on the next phase of this process over here.