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When can a business qualify as tax-exempt?

On Behalf of | Mar 9, 2024 | business law

Individuals who wish to start a non-profit organization should learn what they must do to get tax-exempt status. This status allows them to bypass paying taxes, which allows them to retain any money they earn or receive for use toward the organization’s mission.

Because an organization will not pay taxes, the Internal Revenue Service has strict guidelines for qualifying for this status.

Serve the right purpose

A business can qualify as tax-exempt by being a charitable-type organization. It should exist to serve a purpose rather than to generate profits for its owners or shareholders. The general categories for this status include operations for religious, charitable, scientific, literary or educational purposes.

It may also be a social welfare organization. These organizations operate primarily to promote the common good and general welfare of the community. Examples include community centers, volunteer fire departments and organizations that work to improve public health.

In addition, business leagues, chambers of commerce and real estate boards may qualify as tax-exempt. They must promote the common business interests of their members and must not engage in substantial lobbying activities.

File the application

To receive tax-exempt status, a business must apply for recognition by filing Form 1023 or Form 1023-EZ with the IRS. The agency will review the application to determine if the business meets the qualifications for tax-exempt status.

Once a business has tax-exempt status, it does not pay federal income tax on its income and may qualify for exemption at the state and local levels. To maintain this status, the organization must continue to meet all operational requirements.