Tax-Exempt Businesses

Tax-Exempt Businesses


Many people wonder why certain organizations don’t have to pay taxes. In this article, R.A. Michael and Associates will explain what it takes to classify a business or organization as tax exempt.


The Internal Revenue Service (IRS) classifies charitable organizations as tax-exempt by the designation 501(c)(3), which falls under the Internal Revenue Code 26. This classification applies to churches, religious and educational organizations and private foundations or organizations that support the welfare of humans and animals.


Examples of tax-exempt organizations include: school or community-based organizations such as parent-teacher groups or Girl Scouts, intramural sports clubs, organizations such as booster clubs, organizations that raise awareness on conditions that affect humans and animals such as animal rescues or cancer awareness groups.


Charitable organizations except for those considered for the benefit of public safety are allowed to receive donations to support the mission of the organization. These donations can be used to create grants or special programs. After the organization has received donations, a notice or receipt must be given to the donors so that the donors are aware of the tax-exempt status of the organization.


These organizations are often referred to as “non-profits” because income generated or donations received are not to be used for providing financial support to individuals. All income and donations incurred are to be used as support to carry out the mission of the charitable organizations.


Additionally, tax-exempt organizations are not subjected to paying high federal income taxes. However, the charitable organizations must operate under these specific conditions in order to maintain tax-exempt status. These conditions are as follows:

-Income generated by the charitable organizations cannot provide financial support for private individuals or members who are affiliated with organizational operations.

-Charitable organizations cannot influence decisions that affect political affiliations or organizations, which can be referred to as lobbying. The organizations are not allowed to give donations to individuals who are seeking donations for political campaigns.


To learn more about tax exemption status, liens and appeals, contact R.A. Michael and Associates at (844) 780-1100 today. We are expert tax practitioners in San Diego that will help you file your taxes correctly and avoid any issues with the IRS.