What Does it Mean to Be Tax-Exempt?

Tax-exempt charitable corporations are a surprisingly common part of American life. Most churches, colleges, libraries and charities are organized as tax-exempt charitable corporations, free from the burden that an income tax imposes on most people and businesses. However, being tax-exempt doesn’t mean you’re entirely free of obligations, and if you’re not careful, your tax-exempt corporation could find its status stripped, exposing it to massive financial liability.

Tax-exempt charitable corporations are part of a special class of corporation, known more formally as a 501(c)(3) corporation (after the section of the tax code that governs this type of organization). 501(c)(3) corporations are not subject to either a personal income tax or a corporate income tax, unlike other kinds of corporations. They may still be subject to other kinds of taxes- a church organized as a 501(c)(3) corporation still needs to withhold Social Security taxes for its employees, for example- but their income itself is not taxed.

There are a few caveats to this benefit, however. First, tax-exempt status isn’t automatic; it needs to be applied for by a corporation that wants its benefits. Second, it must meet certain criteria to qualify for tax-exempt status, such as not allowing its income to inure to any private party or stakeholder, and not engaging in certain prohibited conduct, such as political campaigning. Third, 501(c)(3) organizations still need to maintain their financial records so they can be publicly scrutinized. Violation of any of these requirements can result in the revocation of tax-exempt status, meaning your corporation will be liable for income taxes for any period in which they are found to be in violation.

If you need any help starting your nonprofit organization, or have questions about applying for tax-exempt status, you’ll need an attorney who thoroughly understands not-for-profit law and their tax implications. The non-profit law attorneys at Wingate, Kearney, & Cullen, LLP have offices in Brooklyn and Long Island, New York.  The firm is experienced in incorporating religious and nonprofit organizations and applying for tax-exempt status. For more information or to schedule a consultation, call (718) 852-5900 or fill out our contact form.