As long as they already have incorporated, nonprofit organizations often do not have to pay property taxes. Although it varies by location, many states, counties and municipalities make allowances for registered charitable organizations to either not pay property taxes or to have the property taxes they pay reimbursed. These exemptions, however, are rarely automatic. Often, a qualifying nonprofit must apply for property tax exemption or reimbursement every year.
A nonprofit organization that has not received tax exempt status from the Internal Revenue Service usually will have to pay property tax. Once a nonprofit organization has applied for and received tax exempt status from the IRS, it then can apply for property tax exemptions to the state, county and/or municipality that collects property tax. The federal government does not collect property tax. The IRS will issue a nonprofit a tax-exempt number. This number is required by most taxing authorities before they will issue a property tax refund, or exemption.
After attaining a tax exempt number from the IRS, a nonprofit must arrange with each property tax authority for exemption or reimbursement. Under most circumstances, tax-exempt status is granted to organizations that fill special roles in the community. As a result, some smaller nonprofits might gain exemption from municipal property taxes, but not county or state property taxes. Each level of government might have different criteria, and the criteria will vary depending on the state. As part of a nonprofit corporation's due diligence, it is critical to investigate the property tax rules for the area the nonprofit will occupy.
An organization can operate as a nonprofit without having a tax exempt number as long as it doesn't have any tax liability. This can occur when a group has a fundraiser, for example, and donates all the proceeds to a tax exempt charity. Only incorporated nonprofits, with IRS-issued tax exempt numbers, can avoid paying taxes. Once a nonprofit has incorporated and received its tax exempt number, it is automatically exempt from corporate income tax only. All other tax breaks and incentives, including property tax, have to be applied for individually.
In some cases, nonprofits that are exempt from property taxes may also be exempt from municipal and county fees, such as those for water and sewer. Depending on the amount of work a nonprofit corporation does in the community, some towns and counties waive utility, building or inspection fees. Although it varies by location, it can be a considerable benefit to a nonprofit.