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Are Nonprofits Exempt from Paying Property Taxes?

Is it a good thing to be a nonprofit? It all depends on what you’re looking for as there are many perks including not paying income tax which can be a huge draw to becoming such an entity.

Is it a good thing to be a nonprofit? It all depends on what you’re looking for as there are many perks including not paying income tax which can be a huge draw to becoming such an entity.

Other benefits for those nonprofits that qualify for federal tax-exempt status are, by law, also exempt from paying property taxes.

What are some examples of nonprofits? Trade associations, labor organizations, private foundations, and public charities.

Proper Filing

But before you get ready to jump on board the nonprofit bandwagon, know that most nonprofits must fulfill federal requirements to be classified as tax-exempt. If an organization meets certain requirements, it can bypass paying income and property taxes.

To help those who fall into the nonprofit sector the IRS created a procedure for such organizations to follow to become tax-exempt.

It begins by completing the state-specific process to form a business entity, obtain a federal employer identification number and designate a federal tax classification.

Businesses then complete federal application forms for tax-exempt status and submit these to the IRS.

After the tax-exempt status is granted, an organization maintains its status by complying with ongoing measures such as regularly filing required reports and returns.

Those nonprofits that qualify for federal tax-exempt status are, by law, exempt from paying property taxes in all 50 states. The value of the exemption depends on the size and type of the real estate owned by the nonprofit.

One website says for example, “a community food bank doing business out of a suburban warehouse The site also cites this example: “Property taxes also depend on the region; a property tax exemption in California or New York is more valuable than an exemption in places like Louisiana, which has one of the nation’s lowest property tax rates.”

Payments instead of Taxes

Local governments offer services to nonprofits even though they don’t pay property taxes. Because of nonprofits’ tax-exempt status, homeowners and for-profit businesses pay the bill for providing amenities like street lamps and law enforcement to the nonprofit organizations within the community.

To make it fair for taxpayers, some cities require all property owners, including nonprofits, to make payments in place of taxes. Other municipalities impose fees for certain services such as fire protection or snow removal.

Other Exceptions

While it may sound like a dream, nonprofit organizations are not exempt from paying all taxes. For example, the IRS reports organizations that hire employees must pay payroll and other taxes on their employees’ wages.

Also, non profit organizations that operate unrelated business activities and make money must pay taxes on the income the activities bring in

Still Curious

Here is more info from the IRS.Gov website regarding nonprofits:

“To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes outlined in section 501(c)(3), and none of its earnings may be insured to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”

“Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions per Code section 170.”

“The organization must not be organized or operated for the benefit of private interests, and no part of section 501(c)(3) organization’s net earnings may insure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.”

“Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct. For a detailed discussion, see Political and Lobbying Activities. For more information about lobbying activities by charities, see the article Lobbying Issues PDF; for more information about the political activities of charities, see the FY-2002 CPE topic Election Year Issues PDF.”

Be sure you know all the laws and pertinent information if you are a nonprofit organization. Kiplinger lists tax rates by state.

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