Many people assume that all nonprofit organizations are automatically exempted from all sales and use taxes. This is not necessarily the case. Organizations are subject to taxes unless there is a specific exclusion or exemption. Tax law is complex and ever-changing and varies from state to state.
California Tax Exemptions for Nonprofits
In California, exempt organizations include domestic nonprofit, public benefit and mutual benefit corporations, along with religious institutions, foreign nonprofits, nonprofit associations, qualifying trusts and entities without shareholders. In many cases, these types of organizations may not be subject to taxes on many purchases or on certain sales. It’s important to note that while nonprofits and religious organizations may be exempt from federal and state income tax, there is no overarching exemption from California sales and use taxes. For the most part, nonprofits are subject to the same taxes for sales and purchases that any regular business would be responsible for, but there are some exemptions available to specific types of organizations.
California Property Taxes
Property that is owned and operated by some nonprofits may be exempted from local property taxes. This exemption is known as the Welfare Exemption.
California Payroll Taxes
As a whole, nonprofit organizations must pay Unemployment Insurance, State Disability Insurance, Employment Training Tax and Personal Income Tax withholdings. 501(c)(3) exempt organizations, however, have choices when it comes to the payment of unemployment costs.
State Income Tax
Organizations who have received a determination letter from the state of California, stating that they are exempt from the California franchise and income tax are considered tax-exempt. Even organizations that have received a federal exemption must obtain a state tax exemption to receive the California exemption. These are two separate processes.
Federal Income Tax and Payroll Tax
Only organizations that have formally filed for and received federal tax-exempt status are exempt from federal income and payroll taxes. The IRS administers this process. A letter is provided to each qualifying organization that recognizes and outlines their exemptions.
There are many transactions made by nonprofit organizations that may be considered sales. Sales of books, food, beverages or tickets for activities may be subject to taxes in California. In some cases, an organization may receive a refund from the state, if it has paid taxes when it was not required to. California nonprofit organizations are subject to complicated requirements and guidelines, especially when it comes to tax exemptions. This is why it is so important to partner closely with a local accounting firm who is experienced in working with nonprofits.
We assist and advise our clients with a variety of accounting services. We provide financial statement compilation and review services as well as the testing and structuring of internal controls. Our firm has experience with all types of business entities and nonprofit organizations. If you have any questions about services, one of our CPAs would be happy to speak with you at (925) 933-2626 or, email us at email@example.com.