Nonprofit v. Tax-Exempt

The term ‘nonprofit' and ‘tax-exempt' mean the same thing, right? Wrong. Although in everyday communication the two concepts are often used interchangeably, their differences are important to know if you are involved in the nonprofit sector. Here is a summary of the distinctions between a nonprofit and a tax-exempt organization:

Definitions

• Nonprofit- a business entity that is organized for a nonprofit purpose and is recognized by state law. Nonprofits are usually corporations, but they can also be certain types of trusts, associations, and limited liability companies.
• Tax-exempt- a nonprofit that is recognized by the IRS (the IRS operates at the federal level) as being organized for any purpose allowable under 501(c)(3) - 501(c)(27).

*Note, for purposes of this article, tax-exempt entities will be referred to as having 501(c)(3) status as it is the most common type of tax-exempt organization. There are several different types of tax-exempt organizations as stated above.

An organization can be a nonprofit and yet not be tax-exempt. Nonprofits are incorporated at the state level, often in the state in which they primarily operate. For a nonprofit to gain tax-exempt status, it must also file Form 1023. If a nonprofit never obtains tax-exempt status with the IRS, it is a taxable entity. Taxable corporations must file Form 1120 and pay income tax. Conversely, a nonprofit that has obtained tax-exempt status generally does not have to pay income taxes (except for organizations that receive unrelated business income and must pay the associated tax) and files Form 990.

Moreover, if a nonprofit does not have tax-exempt status, the organization cannot receive tax-deductible charitable contributions. Additionally, it is far less likely for a nonprofit to receive a foundation grant without tax-exempt status. The benefits of obtaining tax-exempt status are well worth the time and money spent to do so.

At Mission Counsel, we not only help establish nonprofit organizations, but we also help them obtain tax-exempt status. For assistance in either area, contact us.

Additional Resources:

https://www.irs.gov/charities-non-profits/frequently-asked-questions-about-applying-for-tax-exemption