What entities are tax-exempt as charitable activities?
Nonprofit organizations that do not distribute profits can be exempt from federal income tax if organized expressly for public purposes.
Although many nonprofits qualify for tax exemption, only about two-thirds also qualify to receive contributions that donors can deduct on their tax returns. These are organizations of “charitable purpose,” defined under section 501(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 organizations are created to distribute funds to charities or individuals.
Tax-exempt organizations (including charities) include many diverse 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 (IRS)—classifies into 9 major groups, 26 categories, and over 600 subcategories. The major groups are as follows:
- Arts, culture, and 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 2012, approximately 1.44 million tax-exempt organizations were registered with the IRS. These nonprofits accounted for 5.3 percent of U.S. gross domestic product (as of 2014), and paid 8.3 percent of U.S. wages and salaries (as of 2010).. About 35 percent of registered nonprofits are required to file annual returns (Form 990, 990-EZ, or 990-PF); organizations with gross receipts between $25,000 and $50,000 must file a simpler information return known as the 990-N (e-postcard). Religious congregations, as well as organizations with less than $25,000 in gross receipts are exempted from the annual filing requirement. All private foundations are required to file the 990-PF.
Tax-exempt status confers multiple benefits. Not only are nonprofits exempt from federal tax on earnings from their income-producing activities, but charities also sometimes qualify to issue tax-exempt bonds and are often exempt from state and local property taxes and sales taxes. A recent controversy between the IRS and tea party organizations that applied as social welfare organizations but not charities centered on tax exemption.
Boris, Elizabeth T. 2006. “Introduction: Nonprofit Organizations in a Democracy: Varied Roles and Responsibilities.” In Nonprofits and Government, 2nd ed., edited by Elizabeth T. Boris and C. Eugene Steuerle, 1–36. Washington DC: Urban Institute Press.
Brody, Evelyn, and Joseph J. Cordes. 2006. “Tax Treatment of Nonprofit Organizations: A Two-Edged Sword?” In Nonprofits and Government, 2nd ed., edited by Elizabeth T. Boris and C. Eugene Steuerle, 141–80. Washington, DC: Urban Institute Press.
McKeever, Brice S., and Sarah L. Pettijohn. 2014. “The Nonprofit Sector in Brief 2014: Public Charities, Giving, and Volunteering.” Washington, DC: Urban Institute.
National Center for Charitable Statistics. 2015. “Frequently Asked Questions.” Washington, DC: Urban Institute.