Forming a Pennsylvania nonprofit corporation does not necessarily mean that an organization is exempt from federal income tax or from other applicable federal, state, and local taxes. Check out our other, related how-to topics below on how to become a 510(c)(3) and to stay compliant with Pennsylvania law for some other important tasks your nonprofit organization may need to tackle after starting up.
Startup Expenses – Charitable Donation or Loan?
If you funded your organization’s startup costs yourself, it is important to consider during the startup phase, at the time the funds are provided, whether you want to treat those payments as a loan to the organization (so that you can be paid back), or whether you would like to treat the funds as a charitable contribution to the organization. Ask your accountant to help determine what is best for you. In the meantime, if you are making a loan to a nonprofit organization (or if someone else is), the organization will need to document it and make expectations clear. If you expended funds for startup on behalf of the organization and a charitable income tax deduction is important to you, but the organization does not yet have federal tax-exempt status, having a loan agreement in place may be necessary so that you can take a deduction for those startup expenses, by forgiving the amounts due under the loan agreement after incorporation and/or after tax-exempt status of the organization is recognized by the IRS. See our Template Loan Agreement for a sample short-term, zero-interest loan agreement and consult with your tax advisor.
Check out our other, related how-to topics below on how to become a 510(c)(3) and to stay compliant with Pennsylvania law (when it’s available) for some other important tasks your nonprofit organization may need to tackle after starting up.