When considering the issue of taxation, one of the most common points in need of clarification is the distinction between having nonprofit status and having tax-exempt status. It’s possible for an organization to have both, but a nonprofit organization does not automatically have tax-exempt status, and vice versa.
Before an organization may apply for tax-exempt status, it must first be recognized as a nonprofit. However, being a nonprofit does not mean an organization cannot make money. The point is that a nonprofit doesn’t exist merely to make money for its members — any profit made must go right back into the organization. The territorial government grants nonprofit status rather than the federal government.
On the other hand, the federal government confers tax-exempt status on corporations, unincorporated organizations and trusts that apply for the designation. The most common classification for tax exemption occurs under Section 501(c)(3) of the Internal Revenue Code, which allows organizations dedicated to charitable, religious, educational and various other types of pursuits to be declared exempt from federal corporate and income taxes.
Nonprofit and tax-exempt statuses offer certain advantages. For example, an organization that is officially recognized as a nonprofit may have additional opportunities such as contracting with the territorial government, utilizing reduced postal rates or applying for tax exemption. Meanwhile, nonprofits interested in reducing their tax obligations, as well as the obligations of potential donors, have good reasons to apply for tax-exempt status. It also provides additional independence and the ability to directly apply for grants, as many grant applications require proof of 501(c)(3) status.
At the same time, these statuses may also have some disadvantages for organizations. Particularly for organizations just starting out, the time, energy and money required to pursue nonprofit and tax-exempt statuses may be a deterrent, and it might be better to focus on establishing the organization’s operations and track record first.
For groups that have been around a while, have experienced some success and intend to continue operating and growing for the foreseeable future, it might be a good idea to pursue nonprofit and tax-exempt status. This is particularly true if the organization intends to apply for grants or expects to do a lot of business selling goods and services in the future.
To be officially classified as a nonprofit or tax-exempt business, your organization must first file the appropriate applications. This process takes into consideration many of the factors outlined above, and to be certain you’re making the best decision and following the proper procedures, it’s best to seek the counsel of an experienced and qualified business attorney.
BoltNagi is a well-respected and established business and corporate law firm serving clients throughout the U.S. Virgin Islands.