The history of tax exemption in the U.S. dates back to the Wilson-Gorman Tariff Act of 1894. Modern rules regarding tax exemption were established with the passage of the Internal Revenue Act of 1954, which set up the IRS tax code. Since then, the government has passed subsequent legislation tightening the laws regarding tax exemption. The latest example was the Pension Protection Act of 2006, which required tax-exempt organizations to make their reporting forms public.
The primary benefit of tax exemption is that an organization is given relief from paying federal income taxes. As mentioned before, tax-exempt organizations are usually charitable or religious entities such as churches or the Salvation Army.
Typically, tax-exempt organizations must apply with the IRS to be legally tax exempt. The IRS mandates that charitable organizations must not be organized or operated for the benefit of any private individual or entity. The organization also cannot attempt to influence political candidates or legislation.
Churches are a bit different in that they are automatically considered tax exempt as long as they meet the requirements of IRS code. Much like charities, churches also cannot influence political campaigns, elections or legislation and cannot benefit private interests. Churches must be organized for religious, educational or scientific purposes.
Political organizations can be tax exempt while influencing or endorsing political candidates but must file timely notice with the IRS to be considered exempt.
Tax-exempt organizations are responsible for reporting their gross receipts to the IRS. An organization that makes $25,000 or more in gross receipts must file a return by May 15 after the end of the organizations's fiscal year. The due date can be extended three months without cause and an additional three months after that with cause. Organizations that make less than $25,000 are not required to file a return but may have to file an electronic notice with the IRS. If an organization doesn't file a return for three consecutive years, it automatically loses tax-exempt status. Churches don't have to file a return.
Tax-exempt organizations are responsible for the federal income tax, Medicare and Social Security taxes of their employees.
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