Our country’s system for collecting and managing taxes can present a unique matrix of complexities for its citizens. This statement is further strengthened when one is navigating the waters of tax-exempt organizations. If you’re in need of a tax attorney in Maryland for this reason, you’re in luck! JDKatz has been providing professional tax advice for 16 years, helping clients with a number of issues, from tax fraud investigations to simple filing suggestions. Our experienced tax attorneys can help on a wide range of issues concerned with tax law. Today, we’ll look at the basics of tax-emption in our country and issues that people run into when trying to retain their tax-exempt status.

What Does Tax-Exemption Entail?

In layman’s terms, organizations that are tax-exempt are not obligated to pay federal taxes. Typically, this is due to that organization’s status as a nonprofit entity. The government will provide nonprofits with a number of benefits in order to help those businesses succeed without the need for profitable income. A curious aspect of this situation is the determination of statuses. The title “nonprofit” is actually attained at the state level and grants an organization the benefits of state level tax exemptions. The status “tax-exempt” is actually a federal designation that allows institutions the ability to file paperwork that will excuse them from paying federal income taxes.

What Organizations Qualify?

There are currently 29 types of organizations that can qualify for tax exemptions. In general, any nonprofit organization has the potential to attain tax-exempt status. Everything from labor organizations to mutual insurance companies fall under this umbrella. The term “nonprofit” can complicate this list of 501(c) (IRS nonprofit designation) companies. For example, the National Football League was a nonprofit organization from 1966 until 2015. While this often baffles the public, the NFL’s 501(c)(6) status kept them securely in the nonprofit bracket. How? When the NFL and the American Football League (AFL) merged in 1966, the phrase “professional football leagues” was included in the code in order to prevent any antitrust challenges. The verbiage for the league deemed payment for players as a pension fund payment. The public’s opinion on this alleged tax evasion led to the league’s voluntary withdrawal of its tax-exempt status.

What Are The Types?

While the Internal Revenue Service (IRS) holds a unique set of requirements to attain tax exemptions for each category — 501(c)(1)-501(c)(29) — there are two basic types of organizations that can attain tax-exempt status.

  • Public organizations. Entities that qualify for 501(c) are deemed as organizations that receive most of their income from the general public and from governmental assistance. Public support must be found to be a broad income from a wide variety of sources. Tax-exempt statuses are given for religious, charitable, scientific, educational, and literary purposes. Additionally, the entity needs to be a public organization.
  • Private foundations. Private companies that make their income from investors and endowments qualify for 501(c) if they use their income to issue grants to other organizations. While not a public charity, these companies do help in the charity department and are therefore able to become tax exempt.

While many companies and entities become excited at the prospect of not having to pay federal taxes, oftentimes the upkeep and requirements make tax exemptions more of a hassle than anything else. Our Maryland tax attorneys are here to help and offer guidance for such endeavors and will do everything in their power to exceed the client’s expectations. Navigating the arduous landscape of rules and policies for retaining a tax-exempt status is an intensive task on its own. Citizens who make any small mistake can be in for a world of trouble if the IRS leverages tax fraud claims. If you’re in need of tax preparations and advice, don’t hesitate to contact us today!