Just because an organization is formed as a Hawaii nonprofit corporation does not mean that it is exempt from federal tax or that contributions to it are deductible. To achieve that status the Hawaii nonprofit corporation must file an application for tax-exempt status with the IRS, and receive a “determination letter” granting the exemption. The application is made on IRS Form 1023 (for Section 501(c)(3) organizations) or 1024 (for other organizations). The first step is to determine the appropriate category of tax exemption. The Internal Revenue Code grants an exemption from federal income tax to over 25 different categories of organizations. Specific requirements apply for qualification under each category, and the organization’s intended activities will determine which category is most appropriate.
The most favorable type of tax-exempt status is that conveyed by Section 501(c)(3). Organizations qualifying under this section enjoy two significant benefits:
- They are exempt from tax on their income (other than income from unrelated business activities); and
- Contributions to these organizations are deductible for federal income tax purposes by the donor, subject to certain limitations.
Contributions to organizations that qualify for tax exemption under other sections of the Internal Revenue Code generally are not deductible as charitable contributions (although they may be deductible as business expenses in some cases).
Organizations qualifying under Section 501(c)(3) are often referred to as “charities.” The tax law imposes special restrictions on these organizations in exchange for the tax benefits that they receive. A Section 501(c)(3) organization must be organized and operated exclusively for “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition . . . or for the prevention of cruelty to children or animals.”
The vast majority of organizations that qualify under this section are organized for “charitable, religious [or] scientific” purposes. “Charitable” has been interpreted to include a wide variety of activities that benefit the general public, including relief of poverty, advancement of religion, education or science, lessening the burdens of government, defending civil rights and eliminating prejudice and discrimination.
What Your Articles of Incorporation Must Say
Therefore, a Hawaii nonprofit corporation’s articles of incorporation must state that it is organized exclusively for one or more permissible purposes and must not authorize the organization to engage in activities that may further nonexempt purposes.
In addition, a Section 501(c)(3) organization must ensure that its assets will remain dedicated to charitable purposes, even if the organization ceases to exist. Its organizing documents must provide that on dissolution or termination its assets will go to another charitable organization. Assets may not go to donors or board members on dissolution.
In summary, many issues need to be addressed prior to forming a Hawaii nonprofit corporation if the intent is to qualify it as a tax-exempt entity.
Contact us now so you can avoid any issues or penalties for your Hawaii nonprofit corporation.