Income generated by various religious, educational, charitable and other philanthropic associations will often be exempt from federal taxation provided they meet the rules under Section 501(c)(3). In order to qualify under the first part of the section (Section 501(a)) of the code, the association must have articles of association, signed by at least two individuals to show its creation.

These non-profit organizations must be organized and operated exclusively for exempt purposes as set forth in Section 501(c)(3), and none of its earnings can benefit a private shareholder, donor or specific individual.

If all the requirements of section 501(c)(3) are met, then the association will receive federal tax-exempt status on the income, earnings, dividends and charitable contributions received. Most of these associations are required to pay out a portion of income at least annually to beneficiaries, research, science testing, humane treatment of animals, etc.

Taxation at Entity and Owner Level

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