Corporate taxes are filed through Form 1120, U.S Corporation Income Tax Return. This is an advantageous system from some businesses because corporate income is taxed at a lower rate than personal income under a certain level.
S corporations are legally incorporated entities whose tax status is treated the same as an LLC, with business income "passing through" to the owners' and partners' personal income and being taxed at personal income levels. It is increasingly less popular as an option because LLCs offer the same tax structure without the hassle of legal incorporation.
As important as choosing the right legal and tax entity is for a for-profit business, it is even more important for a nonprofit organization. Many nonprofits qualify for tax-exemption, but registering as a nonprofit with the state does not automatically make the organization a tax-exempt entity. In order to be considered a tax-exempt organization, a nonprofit must qualify as a 501(c)3 organization with the IRS. The IRS has strict regulations governing what sort of entities qualify as 501(c)3 organizations.
According to IRS's Exemption Requirements for charitable organization, in order to qualify as a 501(c)3 organization, a nonprofit must meet three important criteria. First, it must be "organized and operated exclusively for exempt purposes;" these purposes are limited to "charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals" (www.irs.gov).
Second, none of its earnings may benefit any private interests or persons. The IRS has careful controls in place to ensure that no net income from 501(c)3 organizations inure to any private shareholders, their families, friends, or anyone else with a personal stake in the charitable organization (Ibid).
Finally, a 501(c) 3 organization cannot organize a substantial amount of its...
While lobbying is not altogether forbidden for charitable organizations -- indeed, it is an important aspect of many nonprofit agendas -- there are many restrictions that the IRS imposes in order to ensure that exercising political influence is not the primary activity of the tax-exempt nonprofit.
In addition to applying for 501(c) 3 status, tax-exempt organizations must also file an Annual Information Return Form, IRS Form 990. This form is essentially a series of questions designed to ensure that the organization is complying with tax-exemption requirements, and "to influence and modify exempt organizations' behavior" in order to create self-regulatory practices within the organizations themselves (Hopkins et al., 2009).
While the Internal Revenue Service can be intimidating to private citizens, corporations, and nonprofits alike, it provides an important service by informing people and organizations about the tax law that applies to them, offering them resources and information to meet their tax responsibilities, and ensuring that the tax law is applied consistently and fairly according to the policies determined by Congress. The more that businesses and nonprofits understand about the role of the IRS and the structural options available to them, the more likely they are to find a tax approach that both benefits them and keeps them in line with IRS expectations and requirements.
References
Daily, F.W. (2010) Tax Savvy for Small Business. Berkeley, CA: Nolo.
Hopkins, B.R., Gross, V.R., and Gross, V.C. (2009) Nonprofit Governance: Law, Practices, and Trends. Hoboken, NJ: John Wiley & Sons.
Mancuso, A. (2010) LLC or Corporation: How to choose the right form for your business. Berkeley, CA: Nolo.
Internal Revenue Service Website. (26 July 2011) Retrieved from http://www.irs.gov/index.html
