Okay – all hear this: Nonprofit Status Does Not Automatically Ensure Exemption!

Nonprofit corporation. These words can mean very different things to different people. Some people thinks this is a corporation that never turns a profit. Not exactly correct. Some people thinks this is a corporation that never pays taxes. Far from correct. Some people think this is a corporation that does not have to pay income taxes. Getting warmer, and sometimes-but not always correct. You see the fact that an organization is formed as a nonprofit corporation does not automatically entitle the organization to tax-exempt status under either California or federal law. Tax-exempt status is a statutory privilege rather than a right and is not automatically recognized or granted. Nonprofit corporations and unincorporated associations are therefore generally subjected to tax under I.R.C. § 11 and Rev. & Tax. Code §§ 23151, 23501 unless they establish a specific exemption.

To be tax-exempt, a nonprofit entity must come within one of the statutes declaring the exemption, and the entity’s purposes and activities can be no broader than those described in the statute. For example, an organization organized and operated exclusively for charitable purposes is exempt from federal income tax [I.R.C. § 501(c)(3)] and from state franchise and income tax [Rev. & Tax. Code § 23701d], and a pleasure club organized and operated exclusively for pleasure, recreation, and other nonprofit purposes is also exempt from federal income tax [I.R.C. § 501(c)(7)] and from state franchise and income tax [Rev. & Tax. Code § 23701g]. However, an organization organized and operated both for charitable purposes and for pleasure, recreation, and other nonprofit purposes would not be exempt from either tax because its activities are not exclusively limited to those set forth in the governing statutes. A nonprofit organization that does not fit into one of the various categories of exempt organizations is not tax-exempt [see Rev. Rul. 63-190, 1963-2 C.B. 212; see also FTB Form 1069].

Okay? You got that? Nonprofit status does not automatically ensure exemption!

I’m glad we cleared that up!

-Lawdog