A:

Section 501 of the Internal Revenue Service (IRS) tax code exempts qualified nonprofit organizations from federal taxes. A nonprofit organization is an organization that engages in activities for both public and private interest without pursuing the goal of commercial or monetary profit. To be exempted from federal taxes, nonprofit organizations have to meet certain rules. Some of these rules include:

    1. Being organized and operated exclusively for charitable, scientific, religious or public safety purposes.
    2. Collecting income and turning over entire amount less expenses to organizations or individuals who are lawfully recognized as legitimate charities.

    If a nonprofit organization engages in activities that are unrelated to their basic purpose, they are required to pay income taxes on that money. For example, if nonprofit organization ABC was formed to provide shelter for the homeless and it makes some money selling bicycles, that income may be eligible for income tax purposes.

    Nonprofits are also exempt from paying sales and property taxes. While the income of a nonprofit organization may not be subject to federal taxes, nonprofit organizations do pay employee taxes (Social Security and Medicare) just like any for-profit company. To learn more about tax issues for nonprofit organizations, go to the IRS website.
    (Learn more about nonprofit financial statements in Navigating Government And Nonprofit Financial Statements.)

    RELATED FAQS
    1. What is the difference between comprehensive income and gross income?

      Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
    2. What tax breaks are afforded to a qualifying widow?

      The tax breaks accorded to qualifying widows or widowers include being able to use a tax filing status that allows for a ... Read Full Answer >>
    3. How is income taxed on prorated salary?

      Since yearly income is viewed by the Internal Revenue Service (IRS) as the total amount of income a person has made over ... Read Full Answer >>
    4. How can I tell which of my business expenses count as write-offs?

      Any basic, reasonably necessary expenses incurred in running a business can be considered possible write-offs. Such expenses ... Read Full Answer >>
    5. What is the difference between a write-off and a deduction?

      There is no difference between a tax write-off and a tax deduction. It's possible that the confusion arises between a tax ... Read Full Answer >>
    6. What is the difference between taxable income and gross income?

      Gross income includes all of the income a person receives during a year that is not explicitly exempt from taxation, whereas ... Read Full Answer >>
    Related Articles
    1. Taxes

      What IRS Form 1023 Is Used For

      To be treated as a tax-exempt organization, start by filling out this form.
    2. Taxes

      Late with Your Taxes? Grab IRS Form 4868

      Fill out this form to get a few more months to file your tax return. But remember, April 15 is still the payment due date if you owe taxes.
    3. Economics

      Explaining Endowment Funds

      An endowment fund is money set aside to earn revenue to fund some type of charitable activity.
    4. Taxes

      What's a Tax Shield?

      A tax shield is a deduction, credit or other means used to reduce the amount of taxes an individual or business owes to the government.
    5. Taxes

      What's an Indirect Tax?

      An indirect tax is levied on goods or services rather than on an individual or a company.
    6. Taxes

      Understanding Excise Taxes

      An excise tax is an indirect levy charged for the sale or use of a particular item.
    7. Taxes

      Understanding the W-2 Form

      The W-2 Form is a standard Internal Revenue Service (IRS) form that employers are required to furnish employees at the end of each year.
    8. Taxes

      IRS Refund Lost? Here's What to Do

      Don't panic. There are a number of reasons your refund might be delayed – and solutions for each.
    9. Economics

      What's a Deductible?

      With insurance, a deductible is the amount of money the insured pays out-of-pocket before the insurance company pays for the loss.
    10. Taxes

      Explaining Taxable Income

      Taxable income is the net of gross income and allowable deductions.
    RELATED TERMS
    1. Endowment

      A financial asset donation made to a non-profit group or institution ...
    2. Duty Free

      Goods that international travelers can purchase without paying ...
    3. Tax Deductible Interest

      A borrowing expense that a taxpayer can claim on a federal or ...
    4. Deferred Tax Asset

      A deferred tax asset is an asset on a company's balance sheet ...
    5. National Motor Freight Traffic Association (NMFTA)

      A nonprofit organization representing interstate, intrastate, ...
    6. Guarantee Company

      A form of corporation designed to protect members from liability, ...

    You May Also Like

    Trading Center
    ×

    You are using adblocking software

    Want access to all of Investopedia? Add us to your “whitelist”
    so you'll never miss a feature!