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Nonprofits: What You Need to Know About Tax Exemption

In the U.S., nonprofit organizations can apply for tax exemptions under Section 501(c)(3). Nonprofit organizations that exist for religious, literary, charity, education, scientific, or public safety purposes qualify for tax exemptions.

Applying for and obtaining tax exemptions offers many benefits to nonprofits. For instance, your nonprofit can easily apply for donations, in addition to being excused from paying the Internal Revenue Service (IRS) income tax. Remember to maintain all necessary documents that show your nonprofit’s tax exemption status.

Just because your nonprofit is exempt from income tax does not mean it is exempt from all taxes. Sales tax is one that most people in nonprofits think they do not need to pay, when in reality, nonprofits in North Carolina need to pay sales and use tax.

Read on to learn more about how to obtain federal tax exemptions, what state exemptions you can apply for, and how sales exemption works in North Carolina.

Obtaining Federal Tax Exemption for a North Carolina Nonprofit

The IRS needs to examine charitable nonprofit organizations’ programs, structures, and governance for these nonprofits to qualify for federal tax exemptions. For the IRS to review your nonprofit, you need to apply through filling a file known as Form 1023. Once you are eligible, the IRS will grant you 501(c)(3) status. You will receive a Letter of Determination if you qualify. An application can take nine months or more.

What State Exemption can I Apply for in North Carolina?

You can apply for various state exemptions. One of the exemptions you should consider applying for is the broad property tax exemption, G.S. 105-278.7, under the Machinery Act. The tax exemption covers educational, literary, and charitable property. If you want to apply the exemption for a charitable nonprofit, you must first ensure that your nonprofit exists for philanthropic purposes. For example, a charitable purpose benefits a significant number of people in the community without you expecting rewards or profits from your acts.

How Does Sales Exemption Work in North Carolina?

In North Carolina, the law expects nonprofits to pay sales and use tax. Sales tax applies when you purchase something. Use tax applies when you store, use, or consume a service or item unless in a situation where you already paid the item's or service's sales tax. However, you can apply for refunds after half a year through the North Carolina Department of Revenue.

However, there are some problems with this system.

  • The refund process is cumbersome to the Department of Revenue and local governments.

  • If you are a small nonprofit, sometimes the expenses, and time you commit to trying to get the refunds are less than the reimbursements you receive.

  • While waiting for a refund, you might be unable to use some of your revenue.

  • Cash flow issues that arise from the refund process can inconvenience nonprofits that lack enough resources.

Need Help Understanding Your Nonprofit’s Tax Exemptions?

If you run a nonprofit or intend to start one, you need to talk to an expert. In case you also need help claiming a refund after paying sales and use tax, contact and consult a qualified attorney.

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