Are non-profit organizations exempted from taxes? Are they required by the government to pay mandatory taxes? To know more about it, read this article below.

Most often, people get confused as to the difference of "for profit" and "non-profit" organizations and payment of taxes for these companies and organizations. Sometimes, they even mistakenly identified for profit as non-profit organizations.

What is a non-profit organization (NPO)?

It is one type of organization which does not distribute profits to shareholders. Instead, it uses its funds to pursue specific and public purposes. It is different to other organizations because it can file tax exemptions as long as it complies with certain requirements of the government.

An organization is deemed as tax-exempt or non-profit if it does not pay taxes. It is different from companies or businesses because these companies are required to pay taxes. Can we still make money in non-profit organizations? Yes, you still can. Bear in mind that even if it is known as NPO, it does not mean losses for you. The primary different between for-profit and non-profit business is where your money goes. You should remember that for organizations to remain viable, they should have more income than expenses. This is where the difference between the two organizations comes in. In commercial business, the revenue is distributed to shareholders or stockholders, while in NPO, the income stays inside the organization to fund programs geared in achieving its goals and missions. You do not have to worry about the status of your investment in NPO because you can still make money in it.

How can an organization achieve its tax exemption status?

To obtain their tax exemption status, it should fit in any of the following categories:

*Educational
*Charitable
*Literary
*Scientific
*Religious

To be exempted from paying taxes, the organization's purpose must be provable and tangible, even if it's categorized as scientific or religious. Some organizations do not qualify to become tax-exempt or non-profit because of their unfeasible purposes. Tax exemption connotes that organizations do not pay state or federal taxes on activities related to their organizational purpose, thus they have to demonstrate that they are actively working to achieve its goals. You should also remember that NPO still pay taxes on their activities not related to organizational purposes such as the sale of unrelated services or items.

How to file for non-profit status?

To file for non-profit status, organizations must file and fill out the Internal Revenue Service (IRS) Form 1023 and pay a filing fee of $850 for those which earn more than $10,000 and $400 for those which earn less than $10,000. Remember that filing fees are subject to change, thus it is important to verify the IRS regularly. However, churches automatically qualify as NPO even if they do not file for tax exemption.

Are NPOs the same as charitable organizations like private foundations and public charities? According to the IRS, public charities are institutions which majority of revenues came from governmental support or from the public, while a private foundation is one type of organization which do not directly disperse funds, instead it issues grants.