Analyzing Tax-Exempt Status: Requirements and Case Study of Mutual Insurance Companies

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Analyzing Tax-Exempt Status: Requirements and Case Study of MutualInsurance CompaniesExempt OrganizationAnalyze the major requirements for an entity to qualify as exempt. Explain the manner inwhich these requirements helpsupport the entity and its goals.From the e-Activity, describe the details of the example that you researched, examining the key reasons why thisorganization qualifies as tax exempt. Provide support for your findings.Analyze the majorrequirements for an entity to qualify as exempt. Explain the manner in which theserequirements help support the entity and its goals.IRS Definition of Tax-ExemptThe IRS outlines the requirements for tax-exempt entities in Section 501c of the InternalRevenue Code. According to the code, an entity must meet two major requirements to qualify fortax-exempt status. It must be organized to operate primarily for purposes that the IRS qualifies asexempt--charity, religion, or civil rights--and must benefit the public good rather than anindividual owner. It may not operate primarily for the purpose of action activities, such aslobbying or advancing the campaign of a particular political candidate.Meaning of Tax-Exempt StatusWhen anorganization is declared tax exempt by the IRS, it no longer has to pay federal incometaxes. Tax-exempt entities must still pay payroll taxes and other employment taxes. Whether ornot the entity must pay state and local taxes is determined individually by each state and is notaffected by its federal tax-exempt status.Types of Tax-Exempt EntitiesVirtually any type of nonprofit organization can qualify for tax-exempt status. This includescharitable and religious organizations as well as entities devoted to education, literature, scienceand public safety. Many nonprofit sports-related organizations qualify, as do groups set up toprotect the welfare of children and animals. A variety of business leagues, fraternal organizationsand social clubs may also qualify for tax-exempt status.http://finance.zacks.com/meaning-tax-exempt-entity-4267.htmlFrom the e-Activity, describe the details of the example that you researched, examining the key reasons why thisorganization qualifies as tax exempt. Provide support for your findings.While I knew religious, charity and not for profit organizations are tax exempt, I found MutualInsurance Companies most interesting.Amutual insurancecompany is aninsurancecompany owned entirely by itspolicyholders.Anyprofitsearned by a mutual insurance company are rebated to policyholders in the form ofdividenddistributions or reduced future premiums. In contrast, a stockinsurance companyisowned by investors who have purchased company stock; any profits generated by a stockinsurance company are distributed to the investors without necessarily benefiting thepolicyholders.

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