As nonprofit organizations are operated under specific codes and regulations, the tax implications have sparked conversation as of lately. While the myths are untangled, Nonprofit Liability Insurance is essential for providing protection to charities.

The first myth is that nonprofit organizations are completely exempt from paying property taxes in states such as Pennsylvania. However, in order to be exempt, the organizations must qualify as a “purely public charity,” which the Pittsburgh Post-Gazette categorizes as:

1) Advance a charitable purpose; 2) donate or render gratuitously a substantial portion of its services; 3) benefit a substantial and indefinite class of persons who are legitimate subjects of charity; 4) relieve the government of some of its burden; and 5) operate entirely free from private profit motive.

A key factor in this definition is lessening the burden of state obligations. For example, Auberle, a nonprofit that serves children throughout eight Pennsylvania counties, provides shelter, food, and education to children in need who were removed from their homes for safety reasons. What’s more, the organization cares for them until the state is able to place them in a stable and safe home environment.

Other states enforce the same regulations, as well. For example, upon approval, California exempts nonprofit organizations under the Welfare Exemption. The Board of Equalization (BOE) will provide the claimant with an Organizational Clearance Certificate if they are eligible under California Revenue and Taxation Code (R&TC) Section 23701, according to California.gov.

However, in Texas, not all nonprofits are qualified for such benefits. According to the Texas Secretary of State, a Texas nonprofit organization—whether a corporation or an unincorporated association—is not automatically exempt from federal or state taxes. To become exempt, the organization must meet certain requirements and apply with both the IRS and the Texas Comptroller of Public Accounts. Depending on which state your client is located, the tax exemptions should be thoroughly reviewed.

As for the next common myth, most believe that nonprofit organizations are either fully exempt or not at all exempt from paying property taxes. However, only organizations that operate full-time as a nonprofit or for charitable causes are exempt. For example, a subsidiary that offers for-profit business for part of the year is not exempt from paying taxes.

Nonprofit organizations seek to leverage the burden of some governmental responsibilities while providing a generous service to their communities. If taxpayers seek to increase the burden of nonprofits, the financial burden and civic responsibility of maintaining these services will inevitably fall into their laps.

At Charity First, we are committed to protecting your nonprofit clients with our tailored coverages. We seek to safeguard your clients’ unique risk exposures as we specialize in this niche market. For more information about our products and services, contact our experts today at (800) 352-2761.