Are Nonprofits Tax Exempt: Everything You Need to Know

Are nonprofits tax exempt? In order to determine this, you’ll need to look at a variety of factors, including the purpose of the nonprofit organization, the category in which it operates, and if any owners or shareholders are financially benefiting from its operations.

A nonprofit company is one that is created for a certain goal; however, if you decide to create a nonprofit, you cannot financially benefit from its existence. Therefore, you must have a not-for-profit goal to help the general public through the organization’s operations. In order to establish a nonprofit, you can do so within the state in which you plan to operate. However, if you wish to file for tax exemption for your nonprofit, this application is done through the Internal Revenue Service (IRS) on a federal level.

How Do I Apply for Tax-Exempt Status?

There are certain steps that must be taken when applying for tax-exempt status for your nonprofit organization. First and foremost, you’ll need to determine what type of non-profit you run. Is it a charitable, religious, or educational organization? Or is it some other type of non-profit organization? Other types of non-profits could include the following (see the IRS website for a full list of other non-profit organization types):

  • Federal Credit Unions, or other organizations created under the Act of Congress
  • Teachers’ Retirement Funds
  • Cemeteries
  • Employee-Funded Pension Trusts
  • Mutual Insurance Companies
  • Cooperative Organizations to finance crops
  • Child Care Organizations

501(c)(3)

If your organization falls under the charitable, religious, or educational organization, then you’ll file 501(c)(3). Remember that you’ll already need to operate a nonprofit organization that qualifies as a 501(c)(3) organization. You’ll need to ensure that you fit the following criteria:

  • You must be organized as a corporation, trust, or unincorporated organization
  • You must operate in a way that furthers your exempt status. For this qualification, you’ll need to abide by a set of rules prohibiting your organization from doing any one of the following: assisting in political campaigns or lobbying activities; carrying out any illegal activities; earnings of the organization cannot financially benefit any shareholders, owners, or any other interested parties within the nonprofit organization; or operate for the purpose of engaging in business that is not related to the organization’s exempt purpose.
  • You must have at least one exempt purpose. Based on the IRS website, any one of the following is considered an exempt purpose: charitable, educational, religious, scientific, literary, promoting sports competition, preventing cruelty to children or animals, and testing for public safety.

Once you know that you are qualified as a 501(c)(3) nonprofit organization, you can file for tax exemption. Simply put, a 501(c)(3) nonprofit is a tax-exempt organization. Before you need to worry about whether or not your nonprofit qualifies as a 501(c)(3) nonprofit, rest assured that some nonprofits automatically qualify for 501(c)(3) status, including a church or other nonprofit affiliated with a church, subordinate organizations that fall under parent groups who are already covered under the tax exemption status, and organizations that generally have gross receipts less than $5,000, i.e. grassroots organizations operated by people with little money or experience to file for exemption. However, even if your nonprofit falls under one of these three areas, you can still file for 501(c)(3) status to simply receive the formal recognition. Therefore, you won’t have to worry whether or not the IRS will come knocking on your door since you have the final stamp of approval for tax exemption status.

Will My Nonprofit Automatically Qualify For Tax-Exemption Status?

While everyone operating a nonprofit has the goal to be tax-exempt, not all non-profits are tax-exempt. In fact, some nonprofits may not be able to enjoy the utmost benefits of tax exemption as a 501(c)(3) nonprofit organization would. For example, if your nonprofit is a teacher retirement fund, then your organization would fall under the “other” category. While it may be tax exempt in some instances, it may not benefit from 100% tax exemption.

If you need additional help applying for tax-exempt status as a nonprofit or if you want to learn more about whether your nonprofit qualifies for tax exemptions, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.

Are Nonprofits Tax Exempt: Everything You Need to Know

Are nonprofits tax exempt? In order to determine this, you’ll need to look at a variety of factors, including the purpose of the nonprofit organization, the category in which it operates, and if any owners or shareholders are financially benefiting from its operations.

A nonprofit company is one that is created for a certain goal; however, if you decide to create a nonprofit, you cannot financially benefit from its existence. Therefore, you must have a not-for-profit goal to help the general public through the organization’s operations. In order to establish a nonprofit, you can do so within the state in which you plan to operate. However, if you wish to file for tax exemption for your nonprofit, this application is done through the Internal Revenue Service (IRS) on a federal level.

How Do I Apply for Tax-Exempt Status?

There are certain steps that must be taken when applying for tax-exempt status for your nonprofit organization. First and foremost, you’ll need to determine what type of non-profit you run. Is it a charitable, religious, or educational organization? Or is it some other type of non-profit organization? Other types of non-profits could include the following (see the IRS website for a full list of other non-profit organization types):

  • Federal Credit Unions, or other organizations created under the Act of Congress
  • Teachers’ Retirement Funds
  • Cemeteries
  • Employee-Funded Pension Trusts
  • Mutual Insurance Companies
  • Cooperative Organizations to finance crops
  • Child Care Organizations

501(c)(3)

If your organization falls under the charitable, religious, or educational organization, then you’ll file 501(c)(3). Remember that you’ll already need to operate a nonprofit organization that qualifies as a 501(c)(3) organization. You’ll need to ensure that you fit the following criteria:

  • You must be organized as a corporation, trust, or unincorporated organization
  • You must operate in a way that furthers your exempt status. For this qualification, you’ll need to abide by a set of rules prohibiting your organization from doing any one of the following: assisting in political campaigns or lobbying activities; carrying out any illegal activities; earnings of the organization cannot financially benefit any shareholders, owners, or any other interested parties within the nonprofit organization; or operate for the purpose of engaging in business that is not related to the organization’s exempt purpose.
  • You must have at least one exempt purpose. Based on the IRS website, any one of the following is considered an exempt purpose: charitable, educational, religious, scientific, literary, promoting sports competition, preventing cruelty to children or animals, and testing for public safety.

Once you know that you are qualified as a 501(c)(3) nonprofit organization, you can file for tax exemption. Simply put, a 501(c)(3) nonprofit is a tax-exempt organization. Before you need to worry about whether or not your nonprofit qualifies as a 501(c)(3) nonprofit, rest assured that some nonprofits automatically qualify for 501(c)(3) status, including a church or other nonprofit affiliated with a church, subordinate organizations that fall under parent groups who are already covered under the tax exemption status, and organizations that generally have gross receipts less than $5,000, i.e. grassroots organizations operated by people with little money or experience to file for exemption. However, even if your nonprofit falls under one of these three areas, you can still file for 501(c)(3) status to simply receive the formal recognition. Therefore, you won’t have to worry whether or not the IRS will come knocking on your door since you have the final stamp of approval for tax exemption status.

Will My Nonprofit Automatically Qualify For Tax-Exemption Status?

While everyone operating a nonprofit has the goal to be tax-exempt, not all non-profits are tax-exempt. In fact, some nonprofits may not be able to enjoy the utmost benefits of tax exemption as a 501(c)(3) nonprofit organization would. For example, if your nonprofit is a teacher retirement fund, then your organization would fall under the “other” category. While it may be tax exempt in some instances, it may not benefit from 100% tax exemption.

If you need additional help applying for tax-exempt status as a nonprofit or if you want to learn more about whether your nonprofit qualifies for tax exemptions, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.