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Consumer Protection Division

Federal Tax Exempt

One of the primary benefits offered to nonprofit corporations is the opportunity for tax exemption under state and federal law.  But, with very few exceptions, nonprofit corporations are not automatically tax-exempt simply by virtue of being nonprofit corporations.  Instead, a nonprofit corporation generally must apply for tax exemption and be recognized as exempt by the appropriate taxing agency.  At the federal level, this agency is the Internal Revenue Service.

APPLYING FOR TAX EXEMPTION

The IRS provides detailed information on the process of gaining and maintaining tax-exempt status under federal law at its IRS Starting Out - Stay Exempt web page.

MAINTAINING TAX EXEMPTION

Once a nonprofit corporation has gained tax exempt status, it must follow numerous operational and reporting requirements to keep that status. For example, it cannot provide substantial private benefits to individuals outside of its nonprofit mission, it is limited and even prohibited from engaging in certain types of political activities, and it must comply with IRS reporting requirements. Failure to comply with these requirements can lead to penalties or even the loss of tax-exempt status. Some of the key areas that pose threats to maintaining federal tax exemption include:

  • Unrelated Business Income - A nonprofit corporation's income that is unrelated to the corporation's purpose may not be tax-exempt. See Unrelated Business Income Defined for more information.
  • Political Campaign Activity - Federal law strictly prohibits 501(c)(3) nonprofit corporations from engaging in political campaign activity. See The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations for more information.
  • Lobbying - Federal law limits 501(c)(3) nonprofit corporations' lobbying activities. While these corporations may engage in some lobbying, too much lobbying activity risks the loss of tax-exempt status.

The IRS maintains a number of interactive courses available to help organizations maintain their tax-exempt status at its IRS Starting Out - Existing Organizations: Maintaining Your Tax-Exempt Status web page.

FURTHER INFORMATION

For further information about the topics discussed on this page, see:

IRS material providing extensive resources for organizations seeking to obtain and maintain federal tax-exempt status: