Tax exemption is the exemption from all or some of the taxes as stipulated in the laws of that country or state. The exemption reduces the tax obligation due from an individual or organization and the tax is foregone. The exemption process will vary in each particular country or state. The tax exemptions are in areas where the Government will want to subsidize or in industries where the Government will want to support or encourage its growth. In reducing the tax obligation, the government is reducing the tax burden and thus encourages growth in that industry.
Non-profit-making organizations are tax-exempt in most countries and states. For an organization to qualify for tax exemption it must meet the requirements and regulations of that state. It must not be operated to benefit an individual; the earnings should not be payable to an individual shareholder. The organization may not participate in any campaign activity, for or against any presidential candidate.
An organization is supposed to apply for recognition of tax exemption, which will result in a formal IRS (Internal Revenue Service) recognition of its status. It should submit two applications: application for recognition of exemption and Employment Number (EIN). If a group of organizations is affiliated then the IRS can at times recognize them as tax-exempt, to avoid each organization making its tax-exempt application.
It is important for an accountant to understand the tax exemption process to reduce the tax liability of the organization without illegally evading tax. These saved funds and resources are diverted to achieving the organization’s goals. The tax exemption will be reduced from the organization’s taxable income thus reducing the amount of tax due. The tax-exemption status will mean the organization qualifies for special grants or government funding which the organization can claim. If the accountant does not know this organization will lose on this benefit.