Tax Exempt Organizations

In the 1800s, Congress decided that the work of certain organizations were so important that it would be beneficial to society if they could keep their funds in order to carry on their works. Rather than paying part of these funds to the federal government as income taxes, Congress chose to exempt these organizations from business income. However, there has been certain limitations established by Congress over the last 100 years. The most popular and largest categories of these organizations are 501(c)(3) organizations. The 501(c)(3) organizations are charitable, educational, and religious organizations. However, there are several other categories of organizations that are exempt from federal income taxes. There are 28 different types of

Nevertheless, tax-exempt status does mean that an organization does not have to pay corporate federal income tax on income. Furthermore, this income must be from activities that are substantially related to the purpose for which the organization was given exempt status. In addition, the organization does pay tax on income that is unrelated to the purpose of the organization called unrelated business income. There are several reasons Congress decided to tax unrelated business income. First, Congress did not think it would be fair for businesses that pay tax Secondly, instead of Congress prohibiting tax-exempt organizations from having any type of business functions, Congress chose to permit unrelated business activities, but the income would be taxed just like for profit business. Lastly, the imposition of a tax on unrelated business income was the best evidence that tax-exempt organizations can engage in business

The statutory rules regarding political activity and lobbying were enacted in 1934 and 1954. The Revenue Act of 1934 required that no substantial part of an organization’s activities be lobbying. Furthermore, the Revenue Code of 1954 added the requirement that charitable organization cannot participate in political campaign activities. On the other hand, under present law, an organization will not be tax-exempt as a charitable organization unless “no substantial part” of its activities are attempting to influence legislation. Also, Public charities may engage in limited lobbying activities if these activities are not substantial. In contrast, public foundations are restricted from lobbying activities, even if they are insubstantial. In order to determine if a public charity’s lobbying activities are substantial, a public charity can elect to choose the “substantial part” test or the “expenditure”