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Nonprofit Vs Tax-Exempt

I have a confession. I’ve used the terms nonprofit and tax-exempt interchangeably over the years, but they are completely different concepts. Just because your organization is a nonprofit corporation, that doesn’t mean it is tax-exempt. Here is how to understand the difference.

Nonprofit status refers to your status under state law and tax-exempt status refers to federal income tax exemption under the Internal Revenue Code (the “Code”) as well as to certain state taxes.

What is Tax-Exempt?

Tax-exempt status means that a nonprofit organization is exempt from paying corporate income tax on monies earned from activities that are substantially related to the purposes for which the group was organized.

Types of Nonprofits

Many people mistakenly refer to all charities as “501(c)’s” or “501(c)(3)’s”. These letters and numbers actually refer to a specific tax category in the Internal Revenue Code.

Nonprofit leaders frequently mention being a 501(c)(3) organization. This category encompasses organizations that are corporations, funds, or foundations that operate for religious, charitable, scientific, literary, or educational purposes.

Conversely, there are 28 other NFPOs that are more narrowly defined. Here are just a few:

Click HERE for handy guide on the most common types of nonprofits.

Just because you have registered your nonprofit with the state, you are not automatically granted tax-exempt status. You must also meet certain state and federal requirements and apply for status with both the IRS and the state.

Before you start down the path of creating a new nonprofit, do your homework and understand where you fit in the world of 501(c)(3) organizations.


Michelle Crim, CFRE

Dynamic Development Strategies can help. We offer coaching and fundraising services for our nonprofit clients. We specialize in startup and smaller nonprofits because we understand your challenges. Please contact us for more information.

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