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Tax exempt organizations enjoy several benefits; one of the most important, of course, is not having to pay taxes on income generated by the business. In order to gain non-profit status, most organizations must meet certain criteria and remain in compliance with federal tax code 501(c)3, which governs charitable organizations. Other forms of non-profit organizations include fraternal organizations, employee benefit associations, and veterans organizations.
Inurement
One of the most critical sections of the tax code concerning non-profit organizations, and one of the places that is easiest to violate is stated as follows in the U.S. tax code: "A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization."
In other words, the revenue generated by the non-profit cannot be used to build the assets and wealth of the private individual who is a stakeholder in the non-profit business. There is a very fine line between the stipend or salary paid to an employee or manager of a non-profit and the inurement of someone with an interest in the organization.
Exempt Purpose
The second criteria that must be met is that the organization must be organized to provide a service that falls within the tax-exempt criteria. These criteria are set forth by the IRS as "charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals." By using the term charitable, the IRS refers to its legal definition of relief to people who are poor or underprivileged, or a purpose of advancing religion or science, or the elimination of prejudice, or the defense of civil rights.
Accepting Charitable Donations
In order to accept charitable donations, the organization must notify the donor that the donation is tax-deductible and provide a receipt to the donor for tax purposes. The exceptions to this requirement include insubstantial donations worth less than $75 for which no consideration is given in return for the donation as well as donations of used clothing. However, due to a change in the requirements for charitable tax deductions, in order for the donor to be able to claim the tax deduction for used clothing, the clothing must be in good, wearable condition.
Political Lobbying
501(c)3 organizations are expressly forbidden involvement in political lobbying or campaigning, and to do so risks having the non-profit status revoked by the government.
State Recognition
In addition to obtaining federal status as a non-profit organization, each state also has its own criteria. In order to be tax-exempt at the state level, the organization would need to comply with the requirements for the state in which the organization is filed.
