Nonprofit Corporations

How It's Taxed

Unless it applies for and is granted tax-exempt status at both the federal and state level, a nonprofit corporation pays taxes on its income at regular corporation tax rates. Every nonprofit corporation that is not tax-exempt remains a C Corporation because it doesn’t meet the requirements for an S Corporation tax classification.

Most nonprofit corporations apply for tax-exempt status. A detailed application form must be completed and sent to the IRS with a required filing fee. The IRS previously would issue an advance letter ruling giving temporary tax-exempt status. These are no longer provided. If an application if properly completed, it will take about 90-120 days for approval if all requirements for tax-exempt status are met.

To receive tax-exempt status, nonprofit corporations are subject to specific restrictions.  A nonprofit corporation may not be organized for the financial benefit a particular person or group of persons, such as the directors, officers or members, or other persons related to these individuals.  It may pay reasonable salaries to directors, officers, employees, or agents for services rendered to the corporation in connection with its nonprofit purpose.  It may not distribute gains or profits to its members while it is in existence, nor may it distribute its assets to members when it is terminated or dissolved (with the exception of Mutual Benefit Nonprofit Corporations).  It may not engage in many political activities without voiding its tax-exempt status.

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