Question: Are All Nonprofits Tax-Exempt?
Answer:
No, they are not. Tax-exempt means that a nonprofit (1) does not pay taxes to the federal government and (2) that its donors can take a tax deduction for their donations to the organization.
Most tax-exempt nonprofits are called 501(c)(3) organizations under the U.S. tax code. There are other nonprofit organizations in the tax code, but most tax-exempt ones are 501(c)(3).
Organizations must meet three tests to achieve 501(c)(3) status:
I. The Organizational Test
Tax-exempt nonprofits must be organized for a lawful purpose in one of these categories:- Educational
- Religious
- Charitable
- Scientific
- Literary
- Testing for public safety
- Fostering certain national or international amateur sports competitions
- Preventing cruelty to children or animals
II. The Political Test
Organizations seeking 501(c)(3) status must state explicitly in their organizing papers that they will not participate in any political campaign on the behalf of any candidate or make expenditures for political purposes. There are 501 groups that can engage in these activities, but not 501(c)(3) organizations.III. The Asset Test
A nonprofit's charter must state that it prohibits distribution of assets or income to individuals (except as fair compensation for their services). The organization must also explicitly state that it will not be used for the personal gain or benefit of its founders, employees, supporters, relatives, or associates.A nonprofit must meet all three of these tests in order to qualify for 501(c)(3) status from the IRS.
