Question

How are Tax exemption statuses monitored by the states and/or federal government?

Answer 1

Tax-exempt status means that an organization is exempt from paying federal corporate income tax on income generated from activities that are substantially related to the purposes for which the entity was organized (i.e., to the purposes for which the organization was granted tax-exempt status). Organizations that meet the requirements for federal tax exemption can generally rely on that status to exempt their income from state corporate income tax. Associations are required to comply at all times with the strict guidelines for both tax exemption and nonprofit status in order to maintain their favored status under federal and state tax codes and state corporation laws.

Tax-exempt status to federal income tax exemption is in accordance with the provisions of Internal Revenue Code. Most nonprofit organizations qualify for federal income tax exemption under one of 25 subsections of Section 501(c) of the Internal Revenue Code. Most associations are tax-exempt under Sections 501(c)(3) or (c)(6), and a smaller number under Sections 501(c)(4) or (c)(5). In addition, some 501(c)(6) associations form related educational or charitable foundations exempt under Section 501(c)(3), along with other taxable and/or tax-exempt subsidiaries.