What's the Difference Between "Nonprofit" and "Tax-Exempt?"

What's the Difference Between "Nonprofit" and "Tax-Exempt?"

Many people have a perception that “nonprofit” and “tax-exempt” are interchangeable terms. While they are closely related, they aren’t the same thing. Almost all nonprofit organizations desire to be tax-exempt but becoming tax-exempt is a completely different process and done through a different government agency than becoming nonprofit.

You must first become a nonprofit, granted by the state, to be eligible for tax-exempt status, which is then granted by the federal government in the form of the IRS.

To explain the terms a little more in depth:

Nonprofit Status: a nonprofit is any organization for which those who control or support it do not earn a profit. This doesn’t mean that the organization doesn’t make money; it just means that 100% of the profits go back into the organization. These organizations make a profit to help keep them in business, but making money is not their reason for being in operation. Individual states grant nonprofit status, but the federal government must recognize the organization as a nonprofit before applying for tax-exempt status.

Federal Tax-Exempt Status: Organizations that qualify to be exempt from federal taxes are best known by the tax code 501(c)(3), or the “charitable tax exemption.” Having this designation allows exemption from federal corporate or income taxes for most types of revenue. Also, 501(c)(3) organizations are able to solicit tax-deductible contributions. The charitable tax exemption is most appropriate for many community organizations, but it’s important to do your research prior to filing for your nonprofit status. There are a total of 26 exemptions under the tax code, all relating to different purposes. Just because an organization is tax-exempt doesn’t mean that the organization doesn’t file a tax return. They still must file a tax return – Form 990, which is a public document. This is how some donors research organizations to determine how they spend their money.

While it may seem intimidating to navigate the nonprofit world, there are countless resources available. Seek out a professional, experienced legal expert to help you through the process.



Image Source: nickvierlaan