A question that we consistently receive from our clients is: Does nonprofit, 501(c)(3), and tax-exempt all mean the same thing? Nonprofit and Tax Exemption are two terms that are continually utilized interchangeably, however they both have different meanings. A nonprofit organization can be categorized as the entity, usually a corporation, is organized for a nonprofit purpose. 501(c)(3) is defined as a nonprofit organization that has been acknowledge by the IRS as being tax-exempt by the moral standards of its charitable programs. Tax-exemption is the result of a nonprofit organization being recognized by the IRS as being organized for any purpose allowable under 501(c)(3).
How does an organization become tax-exempt? To be acknowledged as exempt from federal income tax, it is necessary for the majority of establishment to apply for recognition of exemption. For section 501(c)(3) entities, the law offers only restricted exceptions to this obligation. Making an application for recognition of exemption proceeds in formal IRS recognition of an establishments status, and can be advantageous for that reason.
Are nonprofit and tax-exempt statuses the identical? These two terms are scrupulously related, but are not identical. The majority of organizations that are nonprofit would prefer to be tax-exempt also, which make the phrases difficult to discern for some people. Numerous charitable organizations are at the same time, nonprofit organizations and are acknowledge by the federal government as being tax-exempt. However taking the necessary measures to develop as a nonprofit and becoming tax-exempt involve different procedure, performed at opposing schedules and by different government agencies.
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