Introduction

• Section 501(c) of the Internal Revenue Code provides full tax-exempt status to certain qualifying religious, educational and charitable organizations, as well as to those who conduct such other beneficial activities the government deems beneficial and would like to encourage. In all, 28 types of organizations are exempted under the various rules of Section 501(c). Additionally, federal and state governments reduce the tax burden on certain segments of society, such as the working poor, in most cases reducing but not entirely eliminating tax liability.
  
  

Filing Requirements for Tax Exempt Organizations

• Though tax-exempt organizations do not have to pay taxes, it should not be assumed that an organization doesn't have to keep detailed records of its financial transactions or file a tax return. Actually, tax-exempt groups are more likely than not to be audited at some point in their existence and must be meticulous. Failure to annually file Form 990, the Return of Organization Exempt From Income Tax, may result in fines of up to $250,000 per year, and tax-exempt status can be revoked if the criteria cannot be documented. Certain exempt organizations, particularly those involved in political work, are even required to make their financial records public.
  
  

Deductibility

• It should also not be assumed that a donation to a tax-exempt organization qualifies as a tax deduction for the giver. Of all the organizations exempted from paying taxes under Section 501 (c), only one type qualifies to receive tax deductible donations from the public: churches, educational organizations, public charities and private foundations with the coveted 501(c)(3) designation. Individuals donating to these organizations can deduct contributions up to 30 percent of their adjusted gross income. Gifts to any other tax-exempt group do not generate a deduction for tax purposes.
  
  

Specific Tax Exemptions

• Individuals and organizations that do not qualify for complete tax-exempt status may nevertheless be eligible to receive certain limited tax exemptions. One of the most popular for individuals is the homestead exemption, which varies by state but generally reduces the value of a primary residence that is subject to property taxes. Low-income individuals are generally exempt from paying taxes and may receive refunds of withheld wages through the earned income credit. Most families with minor children qualify for child tax credits. Corporations receive special tax treatment for a broad range of activity, from research and development, the production of crude oil or the use of energy-efficient technology.