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Tax-Exempt Organizations: Which entities are exempt?

Nonprofit organizations that do not distribute profits can be exempt from federal income tax if organized expressly for public purposes. Although many different types of nonprofits qualify as tax-exempt, only about 70 percent also qualify to receive tax-deductible contributions, through their status as organizations of "charitable purpose," defined under section 503(c)(3) of the tax code as "religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition [or]...the prevention of cruelty to children or animals." This definition covers both public charities and private foundations, the latter consisting of those organizations created to distribute funds to charities or individuals.

  • Tax-exempt organizations include a diverse array of entities, which the National Taxonomy of Exempt Entities (developed by the National Center of Charitable Statistics at the Urban Institute and used by the Internal Revenue Service) classifies into 9 major groups, 26 categories, and over 600 subcategories. The major groups are:
    • Arts, culture, humanities (e.g., art museums, historical societies)
    • Education (e.g., private schools, universities, parent-teacher associations)
    • Environment and animals (e.g., humane societies, the Chesapeake Bay Foundation)
    • Health (e.g., nonprofit hospitals, the American Lung Association)
    • Human services (e.g., the Girl Scouts, the YMCA, food banks, homeless shelters)
    • International and foreign affairs (e.g., CARE, the Asia Society, the International Committee of the Red Cross)
    • Public society benefit (e.g., the Rockefeller Foundation, the Urban Institute, civil rights groups, the United Way)
    • Religion-related (e.g., interfaith coalitions, religious societies)
    • Mutual membership or benefit (e.g., nonprofit credit unions, labor unions, fraternal organizations).
  • In 2006 approximately 1.5 million tax-exempt organizations were registered with the IRS (see table). These nonprofits accounted for 5.2 percent of gross domestic product and 8.3 percent of wages and salaries paid in the United States. Far fewer file annual returns (Form 990, 990-EZ, or 990-PF). About 150,000 religious congregations, as well as organizations with less than $25,000 in gross receipts (except for private foundations, all of which must file), do not file annually.
  • Tax-exempt status confers multiple benefits. Not only are nonprofits exempt from federal tax on the surplus earned from their income-producing activities, but charities may also sometimes issue federally tax-exempt bonds and are often exempt from state and local property taxes and sales taxes.
 
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   Entry 2 of 4