Difference Between Nonprofit and Charity Entities
While these terms are sometimes used interchangeably, they have different purposes and implications. All charities are nonprofit organizations, but not all nonprofits are charities.
- Nonprofit status is how an entity is established under state corporate law.
- Charity status is a designation of the IRS tax code.
The nonprofit entity is established at the state level and can apply to be recognized as a tax-exempt charity at the federal level. A nonprofit may or may not choose to be or qualify as charitable at the federal level for a variety of reasons.
Key Takeaways
- Being a nonprofit does not mean you are tax-exempt.
- All charities are nonprofit organizations, but not all nonprofits are charities.
- Charities require a charitable purpose.
Deciding To Be A Charitable Organization
Pros:
- Tax Exemption
- Being a nonprofit does not mean you are tax-exempt.
- Federal income tax exemption is primarily established under one of 25 subsections of Section 501(c) of the Internal Revenue Code.
- Donations to a charity are tax-deductible
- Other kinds of nonprofit organizations may be granted tax exemption, only 501(c)(3) organizations are eligible to receive tax-deductible donations.
- Most states require nonprofits to register as charities if they solicit donations of any kind from the public.
Cons:
- A charity must have a charitable purpose and must act exclusively under that charitable purpose.
- Trustees need to avoid any situation where charitable and personal interests conflict.
- Charity organizations have campaign and lobbying restrictions.
- Charities have increased filing and reporting requirements which are often open to the public.
- Applying to be a charity can be a long and difficult process.
Taxes for a Non-501(c) Nonprofit
Whether, how much, or if a non-501(c) nonprofit pays taxes depends on many factors; you would want to talk to a certified accountant about whether it would be taxed (if not a 501). The short answer is that any funds left over at the end of the year are taxable.
Organizations will want an accountant who is helping and is on the same page with you. Some retained earnings can be held and not taxed if they will be used for growth the next year, sometimes the first $250,000 is exempt. Again, consult a certified accountant as there are many restrictions, and reporting requirements.
Grant Fund Tax Implications
Grant funds are considered regular income. Any funds left over after Dec 31st would be considered profit. Profit is taxed, the current federal corporate tax rate is 25%, plus state income tax could apply if the entity is incorporated in a state with income tax.