Are Nonprofit & Tax Exempt Organizations the Same Thing?

There’s an old proverb you may have heard before—”Nonprofits are tax exempt organizations, but not all tax-exempt organizations are nonprofits.”

Okay, maybe it’s not a proverb—but you get what I’m saying. Sometimes, we use these phrases interchangeably, but there are significant differences that justify their separate designation.

Nonprofit Designation

The labeling of your organization as a nonprofit or for-profit is a perception of state law.

As the law states, for-profit organizations generate revenue specifically for the benefit of their owners and investors.

If you’re recognized as a nonprofit, you are stating that your organization has some other purpose besides creating revenue for owners and investors. But that purpose alone doesn’t necessarily qualify for an exemption from taxes.

Tax Exempt Designation

Like we said earlier, just because you call your organization a nonprofit doesn’t mean it’s automatically recognized as “tax exempt.” You actually need to apply to the IRS for a determination of a tax exempt status.

A 501(c)(3) organization is the most common type of tax exempt organization you will come across.

To become a 501(c)(3) organization, you have to file Form 1023, the Application for Recognition of Exemption Under Section 501(c)(3), with the IRS.

You may also be required to submit an application with your state to be exempt from state income tax and other state taxes.

But as it goes, nonprofit and tax exempt organizations CAN still earn money. If they earn funds that aren’t needed to fulfill a current expense, they can be put towards furthering your organization’s mission (or they can be saved for future activities).

Whether you’re a tax exempt organization or a nonprofit specifically, there’s something for you at ExpressTaxExempt. If you have any questions about your tax exempt or nonprofit organization-filing Form 990, call us at 704.839.2321.