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A Charity, Nonprofit, and Tax-Exempt Entity – Are They All the Same?

Written by Zana Tomich on September 20, 2017 Category: Nonprofits

The words “charity,” “nonprofit,” and “tax-exempt” are often used interchangeably, but they are not synonymous. While a corporation can be charitable, nonprofit, and tax exempt, not all nonprofits are charitable, or tax-exempt.

A nonprofit corporation is a legal entity created under state law.[1] A nonprofit corporation is formed when Articles of Incorporation are filed with the state in which it resides; it has many similarities to a for-profit corporation in terms of structure and governance. While a corporation can be formed as a nonprofit corporation under state law, it must then seek tax exemption to be treated as exempt under federal law.

Not all nonprofit corporations are exempt from federal, state, local or property tax. Tax-exempt status is separate determination made by the Internal Revenue Service under federal law (for purposes of exemption from federal and state income taxes). A nonprofit corporation must apply to the IRS in order to obtain tax-exempt status. The Internal Revenue Code provides for thirty-four different types of nonprofit organizations; yet not all of them are charities. In addition to the IRS exemption, some states and local municipalities may also grant exemption to some nonprofits from payment of state income tax, sales, and property taxes. A nonprofit corporation would need to apply to the state or local municipality for these exemptions as well.

A charity is one of the types of tax-exempt designations under the Internal Revenue Code, and one of the most difficult to obtain. It is often noteworthy because donations to a charity are tax-deductible by the donors. A charity is often classified as such if it meets three general requirements:

  • organized and operated exclusively for exempt purposes (educational, religious, charitable, scientific, literary, public safety, etc.);
  • none of its earnings benefit any private individual or shareholder; and
  • may not attempt to influence legislation as a substantial part of its activities

https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-section-501c3-organizations

In addition to charities, there several other types of organizations that may also apply for tax-exempt status, but those designated under 501(c)(3) receive the favorable treatment for tax-deductions.

For further information or assistance regarding non-profit formation, and tax exemption under the law, please contact the attorneys at Dalton & Tomich, PLC at 313-859-6000.

[1] Nonprofit organizations may also be limited liability companies, charitable trusts, or unincorporated associations. For simplicity, this blog post addresses corporations only.

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