Non-profit organizations are exempt from federal income tax under subsection 501(c) from the Internal Revenue Service (IRS) tax code. A non-profit organization is an organization that engages in activities of public and private interest without pursuing the objective of commercial or monetary profit. To be exempt from federal taxes, nonprofits must follow certain rules.
The main criteria that nonprofits must meet to be tax-exempt include:
- Be organized and operated exclusively for charitable, scientific, religious or public safety purposes.
- Collect revenue and donate the entire amount (minus expenses) to legally recognized organizations or individuals as legitimate charities.
Tax-exempt nonprofits are more likely to generate donations, where the donor can use the donation to reduce their own tax liability.
Nonprofit Benefits of Being Tax-Free
Non-profit organizations, which may include private foundations and churches, are able to raise funds more easily as a tax-free organization. Individuals and other organizations are more likely to contribute to tax-free nonprofits because they can reduce their own tax liability.
Key points to remember
- Nonprofit organizations are exempt from federal income tax under IRS subsection 501(c).
- Non-profit organizations engage in public or private interests without the goal of monetary profit.
- Notable rules for qualifying as a tax-exempt nonprofit organization include being organized for charitable purposes or collecting and remitting money to charities.
Other Nonprofit Tax Exemptions
Non-profit organizations are also exempt from paying sales tax and property tax. Although a nonprofit’s income is not subject to federal income tax, nonprofits pay employee taxes (Social Security and Medicare) like any for-profit business.
The number of nonprofit organizations in the United States registered with the IRS in 2016, according to the National Center for Charitable Statistics
If a nonprofit organization engages in activities that are unrelated to its core purpose, it is liable to pay income taxes on this money. For example, if the non-profit organization ABC was created to provide shelter to the homeless and it earns money selling bicycles, that income may be eligible for income tax purposes. revenue. However, the tax advantages come with greater rigidity for non-profit organizations, which are subject to greater surveillance.