Non profit organizations are normally incorporated in the state or jurisdiction in which they are expected to function. The act of incorporation creates a legal entity enabling the non profit organization to be considered as an artificial legal person in law capable of entering into dealings and contracts or holding property in its own name, like a for- profit corporation. Unlike any for- profit- Corporation, a non profit organization in the USA cannot pay out dividends from its profits or issue stocks.
After incorporation at the state level, the non profit organization applies for tax exempt status to the Internal Revenue Service (IRS) at the federal level. The IRS upon its satisfaction that the applicant outfit conforms to the norms of tax exempt organization with regard to parameters like objects and purpose, vision and mission, spending limits, nature of application of funds and internal checks and balances of a charity; may grant it tax exempt status for income tax only. This exemption does not extend for other federal taxes like employment taxes.
However, even such a tax exempt organization must pay federal unrelated business income tax on its earnings from other activities, which are not the basis of tax exemption.
Donors to these tax exempt organizations are entitled to deduct their contributions up to 30% or 50% of their adjusted gross income to arrive at their taxable income.
In default of compliance with the norms of tax exempt organization, the concerned non profit organization is liable to loose its tax exempt status.
Federal tax exempt status does not by itself ensure exemption from state and local taxes for which there are separate application processes and the requirements may differ as well.
(More:http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html
http://www.irs.gov/charities/charitable/index.html
http://www.stayexempt.org/)
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