Tax exempt status
Before we discuss out topic, let us first discuss about the tax exemptions. The tax exemption is basically an exemption that is allowed by the state or the central government from all or certain types of taxes. These exemptions otherwise form a part of tax that a person or an individual is likely to pay to the government as these forms an important part of tax. The tax exemption is provided by an organization, individual etc that falls within the protected class as far as the tax is concerned of some kind. These exemptions are usually meant for the reduction of the tax burden on the individual, organization.
These are provided to the particular segment of the society amounting to interests of fairness. The tax exemptions are also provided by the appropriate authorities in order to promote some types of economic activities so that the growth can occur at a faster pace by reducing the tax burden on the individuals, organizations involved in particular activity. There are various criteria that are used in granting the tax exemptions like age, ownership of property etc. Let us now discuss about the tax exemption status.
The tax exemption statusThe tax exemption status allows a person, organization etc to know about the status regarding the tax exemptions that are allowed by the government under the various provisions. There are different types of tax exemptions in different countries. We shall be restricting our discussion to United States only. The tax exemption in United States is allowed to the individuals as well as organizations. There are various provisions under which the tax exemptions are allowed. It is very important that any person, organization first confirms the tax exempt status and only on the confirmation, he can go for the exemptions. For example, if a person wishes to get the homestead exemptions, he must confirm the tax exempt status first. Let us discuss the tax exempt status as relates to the various organizations in United States.
As far as the tax exemption status in United States is concerned, the section 501(C) of the IRC, Internal Revenue Code, classifies the various tax exempt organizations. This classification is made in 25 separate categories and each of these categories is treated differently. It is to be understood completely here that the classification of any person or organization etc in one category rather than another can easily make big difference to the tax liabilities and responsibilities of a person. Thus, choosing the right category is the most important function regarding the tax exemption status. It is to be noted here that the organizations in the United States that are exempt under the section 501(C3) are called as charitable or the education tax exemptions. Also, these organizations are defined as being operated exclusively for the charitable, religious, scientific purpose etc for the society. These are mostly the non profit organizations and thus, no part for their earnings are used to injure the benefit of any type of individual. There are of course many advantages that are granted to these organizations. These advantages are granted as per the classification as a 501(c3) organization.
These organizations are exempt from the taxes that are applicable on dues, dividends, interest, royalties, rent or any other type of income that is not derived from the conduct of any type of unrelated trade or the business. In most of the states in U.S, the type of organizations mentioned above are eligible for the tax exemption from different types of state taxes, which includes the real estate tax and the sales tax. These organizations are also allowed to receive the contributions deductible form the income of the donor that is taxable. The organization can also sponsor the 403 (b retirement plans for the employees that work with these organizations. These are also eligible fort the third class postal rates. Before any organization goes for getting the tax exempt status and other related advantages, it is very important that it fulfills all the requirements for the tax exempt organization as are given in Section 501 (c 3). These requirements are that the organization must be carrying out charitable, educational, or religious activities and it should not serve the business interests of any type of industry or profession relating to any individual etc. The organizations should also not exceed the limitations that are imposed on the lobbying and the various propaganda expenditures. The organization must not include in any type of activity, which is intended to influence the defeat or election of any political candidate. If all the requirements mentioned above are fulfilled, the organization can easily get the tax exempt status. Let us now discuss about the maintenance of the tax exemption status.
Maintenance of tax exemption statusIt is very important that any organization maintains the tax exempt status to get all the advantages. In order to maintain it, each section of the tax exempt must meet two tests. The first test is the organization test and the second one is the operational test. The section that cannot meet either of the two tests mentioned above cannot go for the exemption as are granted under the section 501 c 3. If the section is engaged in any type of substantial non exempt activities, it may not be able to the related exemptions and the entire group may also be debarred from the exemptions. Thus, it is very important that the organizations pass the above two tests separately. In order to satisfy the organizational test, it is very much essential that the articles of incorporations or association any other such constituents by which it is created, must not expressly authorize the concerned organization in engaging other activities as stated and must limit the purposes of the concerned organization to one or more exempt purposes. Given above are the various requirements that are needed for the maintenance of tax exempt status.
Thus tax exemption status is importantAfter going through the above discussion, it can be rightly said that it is very important for any person or organization etc to first confirm its tax exemption status and only then, he can go for the exemptions. Various requirements for the maintenance of tax exemption in case of organization have been mentioned above.
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