Taxes and Tax-Exempt

Tax Information for chartered student organizations

  • A chartered student organization must be a “not-for-profit” organization
    • A not-for-profit organization must use any income or profit for organizational purposes, not for any individual or commercial gain
      • Note that this is not the same definition as used for state and federal “non-profit” purposes
    • A chartered student organization does not obtain exemption from state or federal income or sales tax simply by chartering as a student organization
    • Do not confuse the not-for-profit criteria as defined by the status with the federal Internal Revenue Service (IRS) eligibility criteria for non-profit organizations
    • In order to be considered non-profit by the federal government, in most cases an application must be prepared and submitted
  • The IRS has established eligibility criteria for varying kinds of non-profit organizations
    • There are different application forms for different types of non-profits
    • Carefully analyze which type of non-profit status is most appropriate for the organization
    • Different types of non-profits have different requirements and privileges
      • For example, not all types of non-profit status permit the organization to accept tax-deductible contributions
    • See below for additional discussion of the different types of non-profits
  • If it is determined that the organization meets the non-profit eligibility criteria, the IRS will issue a Letter of Determination which will specifically identify the type of tax-exempt status granted to the organization
    • If determined to be non-profit by the federal government, it is most likely that the state of Georgia will also determine the organization to be non-profit for state tax purposes

Should an organization obtain federal/state non-profit status?

Three main benefits of non-profit status are:

  1. Exemption from federal and state income tax
  2. Ability of certain non-profits to make purchases without paying state sales tax
  3. Ability for certain non-profits to receive tax-deductible contributions

In most cases it is not encourage  that student organizations to apply for federal non-profit status because:

  1. The process involves follow up paperwork annually and most organizations will not be in situations of needing formal federal or state non-profit status
  2. Since many chartered student organizations are ineligible for 501(c)(3) status, filing for non-profit status will not enable the organization to receive tax-deductible contributions or make purchases free of sales tax (see below)
  3. Securing federal non-profit status for tax purposes is a complicated process, which requires an understanding of the technical definitions and requirements of non-profit organizations for tax purposes

If the organization, as its own entity, wishes to apply for federal non-profit status, contact the federal IRS and the state of Georgia or consult a private tax advisor

State and Federal Income Taxes

A chartered student organization is subject to federal and state income taxes on the income it generates or receives (including donations) unless it qualifies as a non-profit organization under federal and state law. There are several different varieties of non-profit organizations that qualify for exemption from federal tax on the organizations income.

  • Most chartered student organizations would likely qualify for federal income tax exemption as a 501(c)(4) “social welfare” organization or a 501(c)(7) “social club”
  • Chartered student organizations must file an application with the IRS regardless of how much money the qualified organization collects

Student organizations that exist and are operated for charitable purposes, as defined by the IRS, may qualify as a 501(c)(3) “charitable” organization. Most of these “charitable” organizations must file an application with the IRS only if the organization receives/earns MORE than $5,000.00 in gross annual receipts per year from outside sources (interest bearing checking accounts, investments, fund-raisers, donations, etc.)

Chartered student organizations that are exempt from federal income tax under any of the above categories are also normally exempt from state income tax. There are special rules for “unrelated business income” that sometimes require non-profits to pay federal and state income taxes on the organizations income that is generated by activities unrelated to the organizations exempt purpose.

  • Ask a parent chapter if the subsidiary is covered by the parent/affiliated organization’s tax-exempt status
    • If the organization is covered by the parent organization’s tax exempt status, obtain a copy of the parent organization’s IRS Determination Letter which shows the organization as a subsidiary of the parent organization.

All chartered student organizations that have obtained non-profit status must file Form 990 annually

Exemptions from paying sales tax on purchases

  • Student organizations are not automatically exempt from paying state sales tax. To find out if the organization may file to become sales tax exempt, refer to Comptroller of Public Accounts, State Sales and Use Tax, Rule 3.322 (Texas Tax Code 151.309, 151.310: Texas Civil Statutes, Article 342-908). If the organization is eligible, the organization must first obtain 501c status from the Internal Revenue Service by submitting IRS Forms 8718 and 1023.  Application processing may take over eight weeks.  Also, refer to Publication 557, Tax-Exempt Status for the Organization.   All of these publications and forms are available on the IRS website.
  • If 501c status is granted, the organization may apply to the state by submitting a letter, a copy of the charter/bylaws, and a copy of the 501c letter of determination from the IRS (if applicable) to the following address:  Tax Policy Division, Exempt Organizations Section, Texas Comptroller of Public Accounts, P.O. Box 13528, Austin TX 78711-3528.
  • Upon a ruling by the State Comptroller’s Office the organization will receive a letter allowing or denying exempt status. If exempt status is granted, please inform Student Activities and provide a copy of documentation for the organization’s permanent file.

If a student organization is purchasing merchandise for resale, it has two options regarding sales tax:

  • Obtain a resale certificate from the State Comptroller’s Office, which will allow the organization to defer payment of sales tax until time of sale. This does not mean that the organization does not pay sales tax. It means that it will collect sales tax for the item when it is resold and that sales tax will then be remitted to the state.
  • Pay the vendor sales tax on the items purchased. Please note, however, that if the organization is selling the merchandise at a mark-up, sales tax must be collected and paid on the mark-up.

Can an organization receive donations that are tax-deductible to the donor?

  • Chartered student organizations are not automatically eligible to receive tax-deductible contributions and instead must qualify for federal 501(c)(3) status.  Organizations that do not qualify for 501(c)(3) status are obligated to inform potential donors of the non-deductibility of any donations.  If the organization is part of a larger regional or national organization, that is who should be contacted to see if that organization can accept that donation on behalf of the local organization.