Tax Exempt Organizations and Nonprofits: Are They The Same Thing?

Often times the terms “nonprofit” and “tax exempt” are used interchangeably in conversation. While tax exempt status is conferred and determined by the IRS.
Many organizations are both nonprofit and tax exempt, there is an important distinction between the two. For example, nonprofit status is designated by the state while

Here’s a more detailed explanation on nonprofits and tax exempt organizations:

According to the IRS, nonprofit status is a state law concept; meaning that an organization must apply for and receive nonprofit recognition from the state in which it does business. 

Once an organization has become a nonprofit it receives benefits, determined by its state, which includes exemption from property taxes, state and local income taxes, franchise taxes, and sales taxes for that state specifically. 

One of the main misconceptions of nonprofit organizations is that these groups are NOT allowed to make any profits throughout their calendar year. In all actuality, nonprofits usually have to turn a regular profit in order to function and operate effectively. Things such as facility upkeep and equipment purchases or repairs, require additional funds that go far beyond their annual expenses. 

As a nonprofit organization, these groups are allowed to receive funds, but any surplus of profit cannot be distributed to an organization’s members, employees, officers, or shareholders, and must be used within the organization to further the mission and goals of the nonprofit. 

An organization who has been granted tax exempt status must have received this recognition from the federal government. Being tax exempt essentially boils down to these two things:

1) The organization does NOT have to pay corporate income taxes on any money generated from the organization 

2) Those who donate money to the [tax exempt] organization can use a tax deduction for their donations when filing their taxes. 

Although most believe that many nonprofits automatically have a tax exempt status, they must apply for tax exempt status separately. The requirements for acquiring tax exempt status can be found in Section 501(c)(3) of the Internal Revenue Code. Generally, the main requirement to have tax exempt status is that the organization must be organized and operated specifically for charitable, religious, educational, cultural, scientific or humanitarian purposes. 

Sounds like a self-explanatory question right? Unfortunately, most misconceive the tax exempt reality. Organizations that are tax exempt technically aren’t completely exempt from tax. 

Although exempt organizations are not required to pay federal income tax, they are still subject to state and local taxes unless there’s a nonprofit designation which exempts them from those payments. 

Additionally, most exempt groups have to pay the employer’s share of their workers’ Medicare & Social Security taxes along with federal unemployment taxes. 

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