When people think about, or hear about, a nonprofit, they often think of an entity that is tax exempt. Depending on the nonprofit, there are many who even view them as exploiting the tax system to avoid paying taxes. The good thing is that Internal Revenue Code Section 501(c)(3), commonly referred to as 501c3, actually has really strict guidelines for tax exemptions.

But what, exactly, is tax exemption? If you think that a nonprofit is exempt from all taxes, you would actually be incorrect. While it’s a basic fundamental of learning about nonprofits and tax exemptions, understanding what these terms actually mean is one of the most vital pieces of knowledge to have.

What Is A Nonprofit?

Let’s start with the word “nonprofit”. According to the Merriam-Webster dictionary, a nonprofit is defined as an entity that is “not conducted or maintained for the purpose of making a profit”. In essence, this is the opposite of opening your own business where the purpose of that business is to make profit. This does not mean that a nonprofit is prohibited from having more revenue than expenses.

However, the word “nonprofit” is not a legal term. Instead, think of a nonprofit as being the actual entity. For example, your local antique store is a small business. That business itself is the entity. A nonprofit is any entity or organization that, as the definition states, does not set out to make a profit.

what does tax exemption mean

Is A Nonprofit Tax Exempt?

The law gets tricky, and there are a lot of technicalities that one has to understand to be able to carefully navigate it. Here is something very important to understand: being labeled as a nonprofit organization does not mean that the nonprofit is tax exempt. Just because an organization’s purpose is not to make a profit does not mean it achieves a tax exemption status.

Why is this important? Let’s use your own charitable donation as a scenario. You find a local nonprofit organization whose mission is to help stop local hunger. You strongly believe in this nonprofit and send them a large donation. While you are helping out your community, you’re getting a sweet deduction for your taxes. Right?

Well, the answer to that is actually “maybe”. A nonprofit organization must actually obtain tax exempt status from the Internal Revenue Service. Only with this official tax exemption on file does the nonprofit become tax exempt. Not only that, but if you donate money to a nonprofit that isn’t tax exempt then your donation isn’t a deduction for your taxes.

What It Means To Be 501c3 Tax Exempt

A true nonprofit organization is one that has the 501c3 tax exemption status granted by the US Internal Revenue Service. This requires an organization to file IRS Form 1023, which is the application to the IRS for 501c3 status. If you’re looking for a nonprofit to donate to and also receive a tax deduction for yourself, you should make sure that the nonprofit can prove that it has been approved for 501c3 tax exemption status.

A 501c3 tax exemption is not a blanket exemption to all taxes. There are still numerous taxes that 501c3 nonprofit organizations are required to pay. While a nonprofit 501c3 is not itself subject to federal income taxes (i.e. donations received are not subject to income tax), they are still legally required to withhold federal income tax for employees. The specific tax exemptions vary depending on the type of nonprofit, and you can read more about that here.

Best Nonprofit Startups and 501c3 Tax Exempt Filing Services In Fort Worth

There are tons of factors to consider when filing for 501c3 tax exempt status for your nonprofit organization. One wrong thing can have your application denied or your tax exempt status revoked. Nonprofit Elite offers the best in 501c3 compliance and consulting, nonprofit startup, and 501c3 filing services. With a 100% IRS approval rate, you are guaranteed a successful 501c3 filing in Fort Worth, Texas.