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Tax exemption article has been posted. |
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Draft text of article Tax exemption. I will post this (after further cleanup) around end-March. Comments welcome. |
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Tax deduction article in the works. See proposed outline in discussion on that article. |
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Tax Exemption |
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Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Such status may provide a potential taxpayer complete relief from tax, tax at a reduced rate, or tax on only a portion of the items subject to tax. Examples include exemption of [charitable organizations] from [property taxes] and [income taxes], exemptions provided to veterans, and exemptions under cross-border or multi-jurisdictional principles. Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances (i.e., an exclusion). Tax exemption also generally refers to removal from taxation of a particular item or class rather than a reduction of taxable items by way of deduction of other items (i.e., a deduction). Tax exemptions may theoretically be granted at any governmental level that imposes taxation, though in some broader systems restraints are imposed on such exemptions by lower tier governmental units. |
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==Specific monetary exemptions== |
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Some jurisdictions allow for a specific monetary reduction of the tax base, which may be referred to as an exemption. For example, the U.S. Federal and many state tax systems allow a deduction of a specified dollar amount for each of several categories of "personal exemptions." Similar amounts may be called "personal allowances." Some systems may provide thresholds at which such exemptions or allowances are phased out or removed.<ref>[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000151----000-.html 26 USC 151], Allowance of deductions for personal exemptions. The amount per exemption is [http://www.irs.gov/formspubs/article/0,,id=177992,00.html $3,650], subject to phase-out. UK [http://www.hmrc.gov.uk/incometax/personal-allow.htm tax free personal allowances] vary.</ref> |
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==Exempt organizations == |
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Some governments grant broad exclusions from all taxation for certain types of organization. As an example, the UK generally exempts public charities from rates, VAT, income tax, and certain other taxes.<ref>For a discussion of UK taxation of charities, see the 1999 Review of Charity Taxation Consultation Document, http://www.hmrc.gov.uk/consult/rct.pdf.</ref> The exclusions may be restricted to entities having various characteristics. The exclusions may be inherent in definitions or restrictions outside the tax law itself.<ref> As an example, [http://www.opsi.gov.uk/acts/acts2006/ukpga_20060050_en_1 UK charities law] defines the types of organizations which may qualify as registered charities, and places limits on their actions. </ref> |
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===Approaches for Exemption=== |
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There are several different approaches used in granting exemption to organizations. Different approaches may be used within a jurisdiction or especially within sub-jurisdictions. |
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Some jurisdictions grant an overall exemption from taxation to organizations meeting certain definitions. The United Kingdom, for example, provides an exemption from rates (property taxes), VAT, and income taxes for entities governed by the Charities Law. This overall exemption may be somewhat limited by limited scope for taxation by the jurisdiction. Some jurisdictions may levy only a single type of tax, so a broad grant of exemption may have the effect of an exemption from only a particular tax.<ref> See, e.g., (citation needed) .</ref> |
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Some jurisdictions provide for exemption only from certain taxes. The United States exempts certain organizations from Federal income taxes,<ref>[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000501----000-.html 26 USC 501(a)].</ref> but not from various excise or most employment taxes.<ref>[http://www.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26_10_D.html 26 USC Subtitle D] excise taxes are imposed on particular goods or services, generally without exemptions. Certain of these taxes apply primarily to tax exempt organizations. See, e.g., [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00004911----000-.html 26 USC 4911], tax on excess expenditures to influence legislation. [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00003101----000-.html 26 USC 3101] and [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00003301----000-.html 3301] generally impose social security and unemployment taxes on all organizations. Note that income from certain types of services, such as services as a minister, may be exempt from the definition of income for these taxes. Note, also, that employees of certain nonprofit and governmental organizations are eligible to participate in different sorts of deferred compensation plans than employees of other organizations. Compare [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000401----000-.html 26 USC 401], IRS [http://www.irs.gov/pub/irs-pdf/p560.pdf Publication 560] and others vs. [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000401----000-.html 26 USC 403(b)], IRS [http://www.irs.gov/publications/p571/index.html Publication 571].</ref> |
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===Charities === |
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Many tax systems provide complete exemption from tax for recognized charitable organizations. Such organizations may include religious organizations (churches, etc.), fraternal organizations (including social clubs), public charities (e.g., organizations serving homeless persons), or any of a broad variety of organizations considered to serve public purposes. |
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The U.S. system exempts from Federal and many state income taxes<ref> Note that under the U.S. system each state is entitled to raise its own taxes. 43 of the states impose a [state income tax]. Some states incorporate or make reference to Federal definitions for parts of their tax laws. See, e.g., (citation needed).</ref> the income of organizations that have qualified for such exemption. Qualification requires that the organization be created and operated for one of a long list of tax exempt purposes<ref>[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000501----000-.html 26 USC 501(c)], which includes more than 28 types of organizations.</ref> and also requires, for most types of organizations, that the organization apply for tax exempt status with the Internal Revenue Service,<ref>[http://edocket.access.gpo.gov/cfr_2008/aprqtr/pdf/26cfr1.501%28a%29-1.pdf 26 CFR 1.501(a)-1(a)(2)].</ref> or be a religious or apostolic organization.<ref>[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000501----000-.html 26 USC 501(d)].</ref> <ref>See IRS [http://www.irs.gov/pub/irs-pdf/p557.pdf Publication 557].</ref> Note that the U.S. system does not distinguish between various kinds of tax exempt entities (such as educational versus charitable) for purposes of granting exemption, but does make such distinctions with respect to allowing a [tax deduction] for contributions. |
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===Governmental entities === |
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Most systems exempt internal governmental units from all tax. For multi-tier jurisdictions, this exemption generally extends to lower tier units and across units. For example, state and local governments are not subject to Federal, state, or local income taxes in the U.S.<ref>[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000115----000-.html 26 USC 115] specifically excludes from taxable income all income of states or municipalities, as well as income of public utilities. This operates as an exemption from tax for state and municipal governments.</ref> |
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===Pension Schemes=== |
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Most systems do not tax entities organized to conduct retirement investment and pension activities for employees of one or more employers or for the benefit of employees.<ref> Examples include: a) The United States exempts under 26 USC 402 pension trust meeting certain qualification; b) Canada ; c) The United Kingdom exempts income and gains of a registered pension scheme from taxation under [http://www.opsi.gov.uk/acts/acts1988/ukpga_19880001_en_16 Income Tax Act section 186], as discussed in the [http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04103010.htm Registered Pension Scheme Manual].</ref> |
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===Educational institutions=== |
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Some jurisdictions provide separate total or partial tax exemptions for educational institutions.<ref> See, e.g., Malaysian Ministry of Higher Education [http://jpt.mohe.gov.my/RUJUKAN/Maklumat%20Insentif%20Untuk%20IPTS%20&%20Borang%20Yang%20Digunakan_120309.pdf chart] of exemptions and benefits for private higher education institutions.</ref> These exemptions may be limited to certain functions or income. |
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===Other not for profit entities=== |
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Some jurisdictions provide tax exemption for other particular types of organizations not meeting any of the above categories. |
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===Reciprocal exemptions=== |
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Some jurisdictions allow tax exemption for organizations exempt from tax in certain other jurisdictions. For example, most U.S. states allow tax exemption for organizations recognized for Federal tax purposes as tax exempt.<ref>(citation needed)</ref> (multi-jurisdictional recognition of exemption) |
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==Exempt individuals == |
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Certain classes of persons may be granted a full or partial tax exemption within a system. Common exemptions are for veterans<ref> See, e.g., [http://www.nyc.gov/html/dof/html/property/property_tax_reduc_individual.shtml#veterans New York City's veterans property tax exemption].</ref> or clergymen.<ref> See, e.g., [26 USC 107] which excludes from income the rental value of a parsonage provided by a church to a clergyman.</ref> The exemption granted may depend on multiple criteria, including criteria otherwise unrelated to the particular tax. For example, a property tax exemption may be provided to certain classes of veterans earning less than a particular income level.<ref> See the New York City rule cited above.</ref> Definitions of exempt individuals tend to be complex. |
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==Exempt income == |
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Most income tax systems exclude certain classes of income from the taxable income base. Such exclusions may be referred to as exclusions or exemptions. Systems vary highly. <ref>Contrast [http://www.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26_10_A_20_1_30_B_40_III.html 26 USC 101-140] exclusions from gross income to [http://www.hmrc.gov.uk/incometax/taxable-income.htm#2 UK non-taxable income].</ref> Among the more commonly excluded items are: |
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*Income earned outside the taxing jurisdiction.<ref> See [International tax] for a discussion of territorial tax systems. Most systems exclude from the tax base income of nonresidents from sources outside the taxing jurisdiction. U.S. states and Canadian provinces provide for formulary apportionment of certain business income to achieve a similar result. See, e.g., the Multi State Tax Compact, discussed in a note below.</ref> Such exclusions may be limited in amount.<ref> See, e.g., [http://www.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26_10_A_20_1_30_N_40_III_50_B.html 26 USC 911, 912].</ref> |
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*Interest income earned from subsidiary jurisdictions.<ref> See, e.g., [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000103----000-.html 26 USC 103], excluding from U.S. Federal taxable income certain types of interest income received on bonds issued by states or political subdivisions thereof.</ref> |
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*Income consisting of compensation for loss.<ref> See, e.g., [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000104----000-.html 26 USC 104], excluding compensation for sickness or injury.</ref> |
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*The value of property inherited or acquired by gift.<ref> The transfer of such property is often taxed separately to the transferor or the transferee. See [Estate tax] and [Gift tax].</ref> |
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Some tax systems specifically exclude from income items that the system is trying to encourage. Such exclusions or exemptions can be quite specific<ref> See, e.g., [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000131----000-.html 26 USC 131] relating to certain foster care payments.</ref> or very general.<ref>(citation needed) |
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==Exempt property == |
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Certain types of property are commonly granted exemption from property or transaction (such as sales or value added) taxes. These exemptions vary highly from jurisdiction to jurisdiction, and definitions of what property qualifies for exemption can be voluminous.<ref> See, e.g., the Texas Sales Tax rules, providing very specific lists of items that are exempt from sales tax. For shortened list of examples of such, see the [http://www.window.state.tx.us/taxinfo/taxpubs/tx96_280.pdf Grocery and Convenience Stores flyer] from the state.</ref> |
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Among the more commonly granted exemptions are: |
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*Property used in manufacture of other goods (which goods may ultimately be taxable) |
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*Property used by a tax exempt or other parties for a charitable or other not for profit purpose |
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*Property considered a necessity of life, often exempted from [sales taxes in the United States] |
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*Personal residence of the taxpayer,<ref> See, e.g., the [http://www.myflorida.com/dor/property/exemptions.html Homestead Exemption] granted in Florida.</ref> often subject to specific monetary limitations |
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==Conditions imposed on exemptions == |
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Exemption from tax often requires that certain conditions to be met. |
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==Multi-tier jurisdictions== |
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Many countries that impose tax have subdivisions or subsidiary jurisdictions that also impose tax. This feature is not unique to federal systems, like the U.S., Switzerland and Australia, but rather is a common feature of national systems.<ref> See, e.g., Japan's prefecture taxes, UK local rates, etc. (citations needed).</ref> The top tier system may impose restrictions on both the ability of the lower tier system to levy tax as well as how certain aspects of such lower tier system work, including the granting of tax exemptions. The restrictions may be imposed directly on the lower jurisdiction's power to levy tax or indirectly by regulating tax effects of the exemption at the upper tier. |
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==Cross-border agreements== |
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Jurisdictions may enter into agreements with other jurisdictions that provide for reciprocal tax exemption. Such provisions are common in an income [tax treaty]. These reciprocal tax exemptions typically call for each contracting jurisdiction to exempt certain income of a resident of the other contracting jurisdiction. |
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Multi-jurisdictional agreements for tax exemption also exist. 20 of the U.S. states have entered into the [http://www.mtc.gov/About.aspx?id=76 Multistate Tax Compact] that provides, among other things, that each member must grant a full credit for sales and use taxes paid to other states or subdivisions. The European Union members are all parties to the EU multi-country [http://www.europarl.europa.eu/ftu/pdf/en/FTU_4.18.2.pdf VAT harmonisation rules]. |
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==External links== |
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*United States: |
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**IRS [http://www.irs.gov/pub/irs-pdf/p557.pdf Publication 557], Tax-Exempt Status for Your Organization |
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**IRS [http://www.irs.gov/charities/content/0,,id=96986,00.html FAQs about Tax-Exempt Organizatons] |
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*UK: |
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**[http://www.hmrc.gov.uk/index.htm HMRC web site] |
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**[http://www.hmrc.gov.uk/thelibrary/manuals-subjectarea.htm HMRC manuals by subject] |
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==References== |
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{{reflist|2}} |
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Revision as of 02:50, 5 April 2010
Tax exemption article has been posted.
Tax deduction article in the works. See proposed outline in discussion on that article.