A Nonprofit Charity is a Business Entity
Helping others through a nonprofit charity is often viewed as noble. But a charity’s good deeds does not provide it carte blanche. In fact, nonprofit charities are highly regulated, and failing to understand those regulations can be disastrous. There are two dozen different types of tax exempt exemptions under the Internal Revenue Code. This article uses the most common exemption – 501(c)(3) – as the example.
First and foremost, the nonprofit charity is a business entity. In Minnesota, first the nonprofit files with the Minnesota Secretary of State as a business entity. Second, the nonprofit applies to the IRS for its tax-exempt status. Nonprofit charities apply for 501(c)(3) status because of its charitable purposes. Third, the nonprofit applies to the Minnesota Department of Revenue for state tax-exempt status, if such status is available. Finally, the non-profit registers with the Minnesota Attorney General’s office, if necessary.
If you have not applied for and do not have 501(c)(3) tax-exempt status from the IRS, even though your business entity is a nonprofit, your nonprofit is not a charity for tax-exempt purposes. The non-profit’s 501(c)(3) tax-exempt status, similar to a for-profit’s S-Corporation status, comes from the IRS and not through the Minnesota Secretary of State as is commonly believed.
The fact that your nonprofit has 501(c)(3) tax-exempt status from the IRS does not mean that your nonprofit is exempt from having to pay Minnesota sales and use tax. Your nonprofit has to apply for that Minnesota status from the Minnesota Department of Revenue and be granted it. For-profit businesses who are doing business with a 501(c)(3) nonprofit charity often automatically waive assessing applicable Minnesota taxes. Doing so, is not proper, and if your business has been doing so, you will want to change your practice immediately (note: just because someone tells you that their business is a nonprofit does not mean it is true). Nonprofit charities must be assessed Minnesota taxes unless the charity provides a certificate of exemption from the Minnesota Department of Revenue.
Most nonprofit charities also have to register with the Minnesota Attorney General’s Office (AG), provide annual reports (note: this is different and in addition to the 990), and pay annual fees. The registration of charities with the AG includes soliciting charities and charitable trusts. In addition, the AG is responsible for enforcing the Minnesota Nonprofit Corporation Act, which applies to Minnesota nonprofits.
Spangler and de Stefano, PLLP assists clients in forming nonprofit corporations, obtaining 501(c)(3) tax-exempt status from the IRS, and advising as to corporate governance.