Why Tax-Exempt Status Is Important for Your Nonprofit
Table of Contents PART 1:
Exemption from federal income tax
PART 2:
Tax-deductible contributions
PART 3:
Opens the door to grant funding
PART 4:
Exemption from state and local taxes.
PART 5:
Reduced postage rate
Exemption from Federal Income Tax
First off, you might be asking what exactly it means to have tax-exempt status. Being “tax exempt” means organizations do not have to pay federal taxes under the United States Tax Code. If your charity applies for and receives 501(c)3 tax exemption designation, which is popularly known as “the charitable tax exemption,” it will allow exemption from federal corporate and income taxes for most revenue coming into your organization.
Tax-Deductible Contributions By securing 501(c)3 status for your nonprofit, you are able to tell your donors and potential donors that their contributions are indeed tax deductible. Donors can do good and take a tax write-off. This can be very appealing to your volunteer and support base, and it can help you scoop up even more donors as you grow your organization. This status can be a tremendous advantage for organizations that rely on contributions as their main source of income.
Opens the Door to Grant Funding. If your nonprofit doesn’t have this designation, it can be tricky trying to engage foundations to help. That’s because the foundation would have to show the IRS that they and you have “expenditure responsibility,” another way of saying the money would be used properly. This can be a lot of work for a foundation, as they would need to file a variety of reports to certify that the funds they contributed to your organization were spent solely for charitable purposes and aligned with what you spelled out in the grant proposal. This layer of paperwork can be offputting, and many foundations will shy away from granting funds to nonprofits without 501(c)3 status.
Exemption From State and Local Taxes
When your organization receives approval for tax-exempt status, the IRS lets you know you’ve received it by sending you a “letter of determination.” This document allows you to prove to the world that your nonprofit is tax-exempt, and you can use it to show foundations when you apply for grant funding as well as to your state for exemption from state taxes.
Reduced Postage Rate
If your nonprofit reaches out to donors and volunteers by mailing newsletters, brochures, membership information, or event invitations, your 501(c)3 tax-exempt status can save you money. Nonprofits are eligible to receive a reduced postage rate from the United States Postal Service if they meet eligibility guidelines. Nonprofit Standard Mail rates are about 40 percent lower than regular postal rates, which can save you money to use in other aspects of your growing organization. Simply fill out a form with the USPS to receive the special nonprofit prices.
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