“The mare fact that a corporation is organized under a not for profit corporation law does not mean that contribution to it are necessarily tax deductible” Discuss

“The mare fact that a corporation is organized under a not for profit corporation law does not mean that contribution to it are necessarily tax deductible” Discuss


Introduction:

A non-profit organization is a group in which no part of the organization’s income is distributed to its members, directors, or officers. Non-profit corporations are often termed “non-stock corporations.” Non-profit organizations must be designated as nonprofit when created. Non-profit organizations include churches, public schools, public charities, public clinics and hospitals, political organizations, legal aid societies, volunteer services organizations, labor unions, professional associations, research institutes, museums, and some governmental agencies.

Non-profit entities are organized under state law. For non-profit corporations, some states have adopted the Revised Model Non-Profit Corporation Act (1986). For non-profit associations, a few states have adopted the Uniform Unincorporated Non-Profit Association Act. . Each state defines non-profit differently. Some states make distinctions between organizations not operated for profit without charitable goals (like a sports or professional association) and charitable associations in order to determine what legal privileges the respective organizations will be given.

An organization is exempt from taxation, If it is organized and operated exclusively for religious, charitable, scientific, public safety, literary, educational, prevention of cruelty to children or animals. Social security tax is also currently optional though 80 percent of the organizations elect to participate. The mere fact that a corporation is organized under a not-for-profit corporation law does not mean that contributions to it are necessarily tax deductible.

The principal activity of non-profit organization is carrying the commercial activity. Some characteristics of an activity indicative that it is not operated in a non-profit manner. The manners are:

  • It is a trade or business that is operated in a normal commercial manner.
  • Its goods or services are not restricted to members and their guests.
  • It is operated on a profit basis rather than a cost-recovery basis.
  • It is operated in competition with taxable entities carrying on the same trade or business.

As a non-profit corporation the entity may carry on an income-generating activity. To qualify the corporation, the income-generating activity must be carried on. The resulting income must be used by the entity to achieve its declared non-profit objectives.

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Non-profit distinction:

Ownership is the quantitative difference between for- and not-for-profit organizations. Profit organizations can be privately owned and may re-distribute taxable wealth to employees and shareholders. Not-for-profit organizations do not have owners. They have controlling members or boards, but these people cannot sell their shares to others or personally benefit in any taxable way.

Nature and goals:

NPOs are often charities or service organizations. They may be organized as a not-for-profit corporation or as a trust, a cooperative, or they may be purely informal. Sometimes they are also called foundations, or endowments that have large stock funds. A very similar organization called the supporting organization. Supporting organization operates like a foundation, but they are more complicated to administer. Foundations give out grants to other NPOs, or fellowships and direct grants to participants.

Legal aspects:

There is a wide diversity of structures and purposes in the NPO landscape. For legal classification and eventual inspection there are some structural elements of prime legal importance:

  • Economic activity
  • Supervision and management provisions
  • Representation
  • Accountability and Auditing provisions
  • Provisions for the amendment of the statutes or articles of incorporation
  • Provisions for the dissolution of the entity
  • Tax status of corporate and private donors
  • Tax status of the foundation

Most countries have laws which regulate the establishment and management of NPOs. It requires fulfillment with corporate governance regimes. Larger organizations are required to publish their financial reports for detailing their income and also expenditure for the public Both non-profit and for-profit entities must have board members, steering committee members, or trustees who owe the organization a fiduciary duty of loyalty and trust. A notable exception to this involves churches, which are often not required to disclose finances to anyone, including church members, though most churches remain fiscally transparent with their members.[citation needed]

Tax exclusion:

In many countries, nonprofits may apply for tax exempt status. So that the organization may be exempt from income tax and other taxes. In the United States, to be exempt from federal income taxes the organization must meet the requirements set forth by the Internal Revenue Service. One of the benefits of supporting a worthwhile cause is the ability to take a federal income tax deduction in some cases. Nonprofit organizations understand which of their donations are tax deductible and which are not. The Council of Better Business Bureaus offers the following tips:

1. Tax Exempt vs. Tax Deductible

“Tax exempt” and “tax deductible” is not the same thing. A tax exempt organization is one that does not have to pay income taxes. Contributions made to certain tax exempt organizations may be deductible on the donor’s federal income tax return. While the Internal Revenue Service (IRS) defines more than twenty different categories of tax exempt organizations, contributions to groups in only a few of these categories are tax deductible.

2. Foundation Status

While its status determines that an organization is eligible to receive tax deductible donations, its foundation status determines the limits of an individual donor’s deduction.

From the general public and from the government, a public charity normally receives a substantial part of its income, directly or indirectly. Public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code. [2]

A private foundation, sometimes called a non-operating foundation. It receives most of its income from investments and endowments which is used to make grants to other organizations [3][4]

charitable activities. Private foundations are defined in the Internal Revenue Code. Most of its earnings and assets directly conduct of its tax exempt purposes by the private foundation.[5]

3. Deductibility Limitation Groups

Organizations perform a substantial amount of legislative lobbying on behalf of specific issues which primarily engage in social welfare activities. Other organizations tax exempt under this section of the Internal Revenue Code include civic associations, some volunteer fire departments, and local associations of employees.

Non-profit organizations ruled tax exempt under section 501(c)(6) of the Internal Revenue Code include business leagues, chambers of commerce, trade associations, real estate boards, and boards of trade. Contributions to 501(c)(6) organizations are not deductible as charitable donations for federal income tax purposes. Donations may be deducted as a business expense if they are “ordinary and necessary” in the conduct of the taxpayer’s business.

Other Tax Deductible Contributions

* Cooperative hospital associations
* Cooperative service organizations of operating educational organizations
* Nonprofit cemetery companies if the contribution is given for care of the cemetery as a whole rather than for a particular plot.
* Domestic fraternal societies and associations and fraternal beneficiary societies and associations, if the contributions are used for charitable purposes.
* Corporations organized and tax exempt under an Act of Congress, which serve as instrumentalities of the US. Examples include the Reconstruction Finance Corporation, Federal Reserve Banks, and Federal Credit Unions.

General Tips on Deducting Contributions

1. Contributions are deductible for the year in which they are actually paid or delivered. Pledges are not deductible until the year in which they are paid.

2. The value of volunteer time or services to a charitable organization is not deductible. However, out-of-pocket expenses directly related to voluntary service are usually deductible.

3. Contributions for which the donor receives a gift or other kinds of benefits are deductible only to the extent that the donation exceeds the value of any benefit received by the donor. (See “When Goods and Services are involved”)

4. Direct contributions to needy individuals are not deductible. Contributions must be made to qualified organizations in order to be tax deductible.

5. Contributions made directly to foreign organizations are not deductible, except in the case of some Canadian organizations as specified in an agreement with that country. Also, donations to charities located in Puerto Rico, the Virgin Islands, and other U.S. possessions are deductible. Such organizations must meet the requirements for exemption under the income tax laws of the United States.

6. The “fair market value” of goods donated to a thrift store is deductible as long as the store is operated by a charity. To determine fair market value, visit a thrift store and check the “going rate” for comparable items. One cannot take a deduction if the goods are sold on a consignment basis whereby the original owner gets a percentage of the final sales price.

7. Donated property may generally be deducted at the fair market value of the property at the time of the contribution. In certain situations, additional details concerning the property’s worth may need to be filed with the IRS in order to make a deduction on your federal income tax forms. Also, gifts of appreciated property are subject to special rules. See a financial advisor for additional details.

8. PAS advises donors to seek professional advice or to consult the IRS when in doubt about the deductibility of contributions. The following IRS pamphlets, available through local IRS offices, also provide useful information. [6]

Types of Nonprofit Organizations

There are wide ranges of organization which are classified as nonprofit organizations. Many of these organizations under the Internal Revenue Code which stipulate the tax-exempt status. These corporations are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, to foster certain national or international amateur sports competition.

1. Charitable organization: Charitable institutions comprise the America’s nonprofit organizations. These include a wide variety of institutions involved in the realms of poverty assistance (soup kitchens, counseling centers, homeless shelters, etc.); religion (churches and their subsidiary possessions, such as cemeteries, radio stations, etc.); science (independent research institutions, universities); health (hospitals, clinics, nursing homes, treatment centers); education (libraries, museums, schools, universities, and other institutions); promotion of social welfare; preservation of natural resources; and promotion of theatre, music, and other fine arts.

2. Advocacy organization: “These groups attempt to influence the legislative process and the political process, or otherwise champion particular positions,” explained Hopkins.  He also said that, “They may call themselves ‘social welfare organizations’ or perhaps ‘political action committees.’ Not all advocacies is lobbying and not all political activity is political campaign activity. Some of this type of program can be accomplished through a charitable organization, but that outcome is rare where advocacy is the organization’s primary undertaking.”

3. Membership group: This kind of nonprofit organization includes business associations and fraternal organizations.

4. Social and recreational group: Country clubs, hobby and garden clubs, college and university fraternity and sorority organizations, and sports tournament organizations all are known as nonprofit organizations. However, their investment income is taxable.

5. Satellite organization: Hopkins pointed out that “some nonprofit organizations are deliberately organized as auxiliaries or subsidiaries of other organizations.” Such organizations include cooperatives, retirement and other employee benefit funds, and title-holding companies.

Advantages and disadvantages of incorporating:

Ted Nicholas noted in “the complete guide to nonprofit corporation” that there are many benefits associated with incorporating but some of them are commonly enjoyed by profit business corporations. Others are unique to the nonprofit corporation. The following principle advantages of forming a nonprofit corporation:[7]

  • Permission to solicit funds—Many nonprofit organizations depend on their ability to solicit funds. It means the form of gifts, donations, bequests, etc. Nicholas noted that whereas some states grant a fund-raising privilege on nonprofit corporations which fulfill additional obligations before granting permission to solicit funds.

  • Low postage rates—Many nonprofit corporations use the U.S. mail system at lower rates than private individuals or for-profit businesses. Nonprofits must apply to the Postal Service for a permit to secure these lower rates. Nicholas said, “The importance of the mailing rate advantage is directly proportional to the volume of mail the nonprofit corporation generates in the course of its business.”  A special mailing system is considerable to service the members. The membership income is used to mail them more widely.

  • Exemption from labor rules— The organization’s labor form a union and they enjoy the exemption by following some rules and guide lines.

But there are also certain disadvantages associated with incorporating. Nicholas cited the following as principle drawbacks:

  • Costs associated with incorporation—
  • Although these costs are usually not too excessive, especially for organizations of any size, incorporation does generally involve some extra costs.

Conclusion:

To maximize the tax deduction, financial Guide lines are provided to satisfying the charitable goals. When an organization claims to be tax-exempt, it does not mean that the contributions are deductible. Tax-exempt means that the organization does not have to pay income taxes. Tax-deductible means the donor can deduct contributions to the organization. The well-known normal charities generally provide deductibility for donations. But surprisingly, some well-known organizations do not. “Tax exempt” does not mean “tax deductible.” A tax exempt organization is one that does not have to pay income taxes. Non-profit organizations ruled tax exempt under the Internal Revenue Code include business leagues, chambers of commerce, trade associations, real estate boards, and boards of trade. Donations may be deducted as a business expense if they are “ordinary and necessary” in the conduct of the taxpayer’s business. [8]

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1. For non-profit associations, a few states have adopted the Uniform Unincorporated Non-Profit Association Act (See Colorado §§ 7-30-101 to 7-30-119).

2Massachusetts law For legal classification and eventual inspection there are some structural elements of prime legal importance:

3. business-law.freeadvice.com › … › CorporationsCachedSimilar

4..tax deductable contribution, www.lectlaw.com/filestex 13.htm.

5.26th march 2010, note required to file from 2023 discusses deductable, charitable contribution to federal income tax.

6. 21 December 2009 this document provide an over view of tax deductable gifts including who can entitle  to receive income tax deductable contribution

7 . The IRS and tax charitable deduction strategy.