Many times we come across individuals who feel that a “nonprofit” and “tax-exempt” entity are the same thing. However, this is not the case and there is an important distinction between the two concepts.
Nonprofit status is a state law concept. Nonprofit status may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions. In Florida, certain not-for-profit organizations are exempt from sales and use tax on purchases and rentals of tangible personal property if that property is used in carrying out the organization’s not-for-profit activities. An entity looking to receive an exemption from sales and use tax must file a Form DR-5, “Application for Consumers Certificate of Exemption,” with the Department of Revenue and be approved for the exemption. Any exemption from Florida’s sales and use taxes has no impact on whether it will also be exempt from Florida’s other taxes such as ad valorem tax or corporate income tax. For more information on obtaining nonprofit status in Florida, visit the Florida Department of Revenue Website.
Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code. There are several varieties of tax-exempt organizations listed in the Code, primarily under Section 501. The most famous of these organizations is the 501(c)(3) charitable organization, which are usually organized to support charitable, religious, scientific, literary, or artistic causes. An organization seeking tax exempt status must file special application forms with the IRS along with supporting documentation to support the application. If the application and supporting documents are sufficient, the IRS will issue a ruling or determination letter upholding the entities tax-exempt status. For more information on obtaining tax-exempt status, interested persons may visit the IRS Website or review Publication 557.
It is always recommended that one consult with an experienced tax attorney before forming a nonprofit or tax-exempt entity since strict compliance with the law is required on both the state and federal level. The federal portion can be especially complicated and until tax-exempt status is assured, donations to a qualified entity will generally remain nondeductible for the donor. Once the entity is successfully established, the proper procedure must be followed in order to remain in good standing. Otherwise, the entity may be joining the thousands who have had their tax exempt status revoked by the IRS this year. If you are looking to establish a charitable entity, contact an Attorney in Jacksonville who can put you in touch with a tax professional today.