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Business Tax Exemptions

During tax season, businesses find ways to reduce their tax bill. If a business is granted a tax-exempt status, it becomes much easier. Below are some tax exemptions that may help your business.

Becoming tax-exempt status

Organizations must apply for recognition of exemption completing either a 1023 or 1024 form to become exempt from income tax. You can find the application at your state sales tax agency. Upon submission, you are charged a user fee.  It is important to answer all questions thoroughly to ensure quick processing. The completed application can be mailed or physically turned in. Some states allow the applicant to complete the application online. If the organization changes in any way during the time the Internal Revenue Service (IRS) is processing your application, the changes must be reported in writing to the office processing your application. When the process is complete, and the application is accepted, the organization’s EIN is granted tax-exempt status by the IRS.

Qualifying tax-exempt businesses

Unlike popular belief, charitable organizations are not the only type of tax-exempt business. If your nonprofit group has a charitable, educational or spiritual purpose, it has a good chance of being eligible for tax exemption. The following businesses could qualify for tax exemption.

Church

The IRS considers a church any place of worship including mosques and synagogues. Those who meet IRS code 501(c)(3) do not have to apply for tax-exempt status, but some still do to let members know their contributions to the church are tax-deductible.

Fraternal orders

Members of a fraternal order have a common interest or pursue a common goal. It must also be organized under a lodge system. Depending on the tax code they are filing, the fraternal order may offer members benefits like life or health insurance.

Education

The most obvious candidates for this organization are primary and secondary schools, colleges, and universities. Counseling agencies, museums, and zoos also fall under this group. Each educational organization must show the IRS exactly how it provides educational activities. Lecture series, classroom instruction, correspondence series, and museum tours are all examples of educational activities.

Social welfare organization

Members of this organization help provide the well-being of their community. The range of functions includes volunteer firefighters, organizations holding annual festivals, and organizations supervising the operation of an airport serving an area without another airport.

Labor organization

An association of workers promoting their interests together and advocating for a range of improvements is considered a labor organization. They may campaign for better working conditions, higher wages, or benefits. IRS considers placing a newspaper ad, a legal defense fund for law enforcement officers, and a union strike as appropriate activities for a labor organization.

Social Club

Social clubs must have a limited number of members and may meet regularly for leisure. The IRS includes social clubs to be country clubs, amateur hunting and fishing clubs, dinner clubs providing a meeting place for members, and clubs organized around particular hobbies. If a shared religion is the club’s main purpose, it can still be tax-exempt if it restricts people of other religions.

Veteran’s organization

The IRS views a veteran’s organization as a group of members of the U. S. armed forces for tax-exemption purposes. Over half of the organization must be past or present members of the armed forces. Activities the IRS deem appropriate include

  • Assisting disabled veterans or their immediate family
  • Provide care to hospitalized veterans
  • Support programs that honor departed veterans
  • Offer recreational activities for veterans
  • Offer insurance benefits to veterans or their dependents
  • Patriotic activities

Scientific research organization

Organizations of scientific research carry out their research in the public’s interest. It is required that their research results are available to the public. Activities include research to cure a disease, supporting the scientific education of college or university students, and helping bring a new industry to the area.

Trade association

Trade associations are nonprofit organizations involved in promoting the common interest of its members. Chambers of commerce, boards of trade, and professional football leagues are all examples of trade associations. Activities include encouraging higher standards within the trade, creating a trade publication, and encouraging the public to use the goods and services of an industry.

Agricultural and horticultural organization

Groups in this organization are those involved in forestry, raising livestock, harvesting crops, and cultivating ornamental plants. Other groups that qualify are nonprofit organizations that educate people about agriculture, those who test soil and share the results with community members and organizations who exhibit livestock or farm products. An organization can host a rodeo and be tax-exempt if the purpose is to educate the public about agriculture.

Finding small business tax exemptions

Most times, the goal for a small business is to increase the profit margin. Lower taxes is one way of doing this. A lot of small business tax exemptions come as business expenses and capital expenses. To see which exemptions your small business qualifies for, consult your tax professional.

Types of deductions

Qualified small business stock (QSBS) allows your business stock to be exempt from income taxes. Your stock qualifies for QSBS if the stock is a domestic C corporation rather than S corporation. At the time of purchasing the stock, you cannot have more than $50 million in assets. It is imperative that the stock is not from a secondary market.

If you use your car for business, you can deduct its expenses. Auto expenses include mileage and usage for business purposes only. Personal use cannot be deducted. Travel expenses include airfare, taxis, and meals.

In your first year of business, you can deduct the capital expenses from the start up. Find the total of advertising, utilities, and office supplies. Currently, you can deduct up to $5,000.

Make sure to include your legal and professional fees. Lawyers, tax professionals, and other consultants you hire through the year are all deductible.

If you sell a product, you can deduct the amount of unsold product that year. The deduction does not apply to small businesses who sell service.

Find how much you paid for business entertaining expenses. You can deduct up to 50 percent of it. Feeding and entertaining your current or potential clients are included in entertaining expenses.

You can write off new equipment the year you bought it for your small business or spread it over the period of several years. Some computer software must be deducted the year it is bought. Consult a tax professional about which deduction is the best.

You can deduct the charitable contributions your small business makes. Contributions include money or equipment.

Deduct taxes your small business pays. Qualified taxes include fuel tax, sales tax, employment tax, and real estate tax.

Determining which business tax exemptions you qualify for may not always be easy. However, this will give you insight you need. If you still have questions, ask a verified tax Expert for assistance. 

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