Understanding our country’s tax laws and regulations can be a very detail-intensive process. Many times, people commit tax fraud or evasion without realizing they are doing as such. Because of this, JDKatz was founded to offer tax law assistance for citizens in need. If you’re in need of a tax attorney in Maryland, we can help! Our firm specializes in providing knowledgeable tax advice to clients in order to minimize their risk while maximizing their return. This base of legal taxation representation can also extend to tax-exempt entities.

Last time, we looked at a couple of areas in which 501(c) organizations can face rescinding of their tax-exempt status. A 501(c) is any institution that is nonprofit and holds the tax-exempt status. Currently, there are 29 types of organizations that the government classifies as nonprofit. The most common entity in this subset as categorized under 501(c)(3), which holds six tenants that citizens need to follow in order to retain their tax-exempt benefits.

Unrelated Business Income

Companies that generate too much income from other sources outside of their nonprofit entity can threaten the tax-exempt status. The money brought in through this venture sources from a regular transaction or trade and is not considered an isolated event. In essence, the income should not be tied to the nonprofit sector in order for penalties occur. This for-profit activity will have to meet three conditions before the income becomes taxable, including:

  • The transaction must be based on business or trade.
  • This activity must be a regular thing.
  • The business is not related to the nonprofit purpose.

Generating income that is unrelated to your nonprofit goal can fall into the taxable range. Additionally, if companies do the activities that generate income more than the non-profit department, their 501(c) status can be in danger.

Private Benefits and Inurement

The practice of receiving personal benefits from a tax-exempt organization is strictly denounced by our government. A 501(c) company is designed to serve the public interest and nothing more. If a person or entity receives benefits from their non-profit, then the exempt status can be revoked.

Inurement prohibition is defined as the denial of the use of assets from a tax-exempt entity to influence or benefit people who are able to exercise control over the exempt organization. Essentially, the income or assets from an exempt organization cannot be utilized for the benefit of any employees that hold the power to make changes or influence the direction of the company. A lot of benefits can be included in this tenant for a lot of employees. From dividends to inflated payment, inurement holds a tricky hold for 501(c) organizations.

Holding a tax-exempt status in our country can be a very beneficial status for most nonprofit entities. However, the rules and regulations behind retaining this status can be complicated, to say the least. If you’re facing legal issues and are in need of a tax attorney in Maryland, we can help! JDKatz works with clients in detail to strive for the best possible outcome. From IRS fraud to tax preparation, our team can do it all. Contact us now to see how we can help to get your life back on track!