Non Profit Organizations
IRS Charitable Organizations
Non Profit Taxes
IRS, tax filing, state tax, are all common words among people who are subjected to taxes. Anybody who earns money from either employment of business is subjected to different types of state tax. Since tax is a very complex matter and is subject to change, not everybody takes the time to fully understand its system. Personally, I am not a big fan of taxation, but in the effort to understand how this works, I will try to dissect the system and try to discuss it in non-professionals’ term.
Federal tax is very popular every April 15th each year; this is because this is the time when all federal income tax return must be filed. However, what really is a federal tax? This is a tax system where all US Citizens are required to set aside a certain amount based from their total annual income and this is to be collected by the IRS. These taxes are then used to support and cover operation costs of the department of defense and the department of education. However, If you are employed, this tax is collected from your pay check each pay period but of you are self-employed, you need to personally declare this to the Internal Revenue Service yourself.
Most businesses like partnerships, sole ownership and limited liability companies are not taxed on business profits, the profits gained by the owners through these businesses are subjected to tax instead. Corporations on the other hand are taxed differently, since they are considered separate entities from its owners, they are thereby taxed basing on all its profits, minus the company’s business operations expenses.
Personally, even if I am not an expert on the subject, I can see a loophole in this system. A tactic that can be used many corporations to reduce taxable profits is to deducts many of their business expenses from the total profit. These usually include operating expenses advertisement, salaries, bonuses and all expenses related to health benefits and retirement plans of the employees. This for me is a form of tax evasion, although I could be wrong.
There have been many discussion about the many ways a company try to evade taxes. Like declaring the company as not-for-profit can immensely decrease the federal tax. Ideally, a not-for-profit organization is formed for other purposes other than profit and gains. These are the companies tagged as 501c by the IRS, which is formed for charity, education, religion and scientific purposes among 24 other categories that will qualify a company as not for profit. The NPO or not for profit organization should have to file necessary applications for tax exemption.
As the name might imply, not for profit companies are often thought as not profitable or not earning a profit. On the contrary, many NPO’s earn surplus revenues but they are required to retain them for self-preservations. Many of these companies’ have paid employees but keep volunteers and unpaid executives just to meet legal requirements. Declaring a company as non-profit allows the NPO org to apply for tax exemption from income and other taxes.
Many Not-For-Profit Companies are built with good intentions; however, it has become an avenue for many companies to commit tax evasion. These days, colleges, hospitals, and pre need companies are all declared as not-for-profit but the IRS are having a hard time distinguishing them from the for-profit counterparts and gauging the revenue impact of such issues. The finance committee has already started taking closer looks at the not-for-profit sectors and have uncovered anomalies and questionable transactions. The misuse of these entities has large impact towards the economy of the state because NPO can mask many of their gains and benefits without being taxed.
It is understood that tax planning is essential in any business whether they are for-profit or not-for profit. To save a substantial amount in a legal manner is one important company goal, but a serious problem that could arise in this issue is when tax avoidance overlaps with tax evasion. Tax evasion is an offense where an organization fails to declare income or claims deductions for business operations that are not legally allowed. Tax avoidance on the other hand, is the practices done by the company that are well within legal bounds to reduce taxable income. The fine line between the two sometimes becomes very hard to distinguish. The bottom line of the matter is that, all business owners and corporations really need to know is the difference between what is right and wrong and the conscience to do what is right.
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