It’s tax season and there’s a good chance you are looking at your records for tax exemptions. Identifying tax exemptions is important to every type of business, but especially important for non-profits.
What is Tax Exempt Financing?
Tax exempt financing is a financial incentive offer to non-profits (or other tax exempt entities) to help the organizations with essential business equipment and further develop their facilities and charitable efforts. Non-profits benefit sign up for tax exempt financing because the interest rate is lower than conventional debt by two percent a year. It may not sound like much but that 2 percent lower interest rate helps non-profits save money and buy equipment and real estate the non-profit organizations need for further growth.
By having low-interest rates as an option through tax exempt financing, non-profits can better manage finance acquisition for the short and long-term. With a tax-exempt lease, you will have the title to any equipment purchased upon signing the tax-exempt lease and you will own the equipment at the end of the tax-exempt lease term. Under the tax exempt lease there’s no residual or buyout at the end of the lease. You do not have to pay the federal government any income taxes on interest generated during the terms of the tax-exempt lease.
Non-profits are not the only types of organizations that benefit from tax exempt leasing. Organizations such as hospitals and universities can also benefit from tax exempt leasing because tax exempt leasing is a flexible lease structure that helps a variety of facilities to develop and renovate at any given time, at the lowest possible cost.
What is the most common type of tax-exempt lease?
The answer is the municipal lease, which provides capital funds to local and state government organizations. The municipal leases have a non-appropriation clause in case the lessee cannot fund future payments due to budgetary issues. In other words, the non-appropriation clause gives the lessee the opportunity to end the tax-exempt lease after the appropriation period and have no future obligation.
What is the primary benefit of a tax-exempt lease?
The primary benefit of tax exempt financing is the lower interest rate available for borrowing capital funds. When a facility can affordably develop with tax exempt financing, it has the opportunity to improve overall work efficiency without purchasing equipment or real estate outright. Instead, facility managers can rent on market rates and always have the option at the end of the tax-exempt leasing term.
By using tax exempt leasing, your organization will keep great liquidity because your credit risk will be lower than purchasing with outright cash. All capital used with tax exempt financing will go towards acquiring or furthering your organization development.
Am I eligible for Tax Exempt Financing?
There are some key tax eligibility criteria your organization needs to meet before receiving tax exempt financing as a non-profit organization. Here is a list of key tax eligibility points:
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Your non-profit organization will exempt from tax under the Section 501 © (3) of the Internal Revenue Code.
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To finance any project that was before the issuing of tax exempt financing, evidence that the borrower will finance that project within the time frame of the tax-exempt lease. In fact, it is a need under the reimbursement rules.
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You must follow the 5% rule which states that only 5% of tax exempt financing is for acquiring any kind of property that’s used by a 501 © (3) non-profit organization.
You can learn more about tax-exempt financing eligibility by reading up on flexible lease structures. Tax exempt leasing is essential for non-profits acquiring property or further developing facilities. Explore all the great opportunities tax exempt financing can offer to your non-profit.
She’s The First is a great non-profit you can support and learn a great deal about non-profit tax exemptions.
