Tax-Exempt Status
The IRS designation that exempts qualifying organizations from paying federal income tax on revenue related to their exempt purpose.
Tax-exempt status is the foundational legal classification that defines a nonprofit organization in the United States. Organizations apply for tax-exempt recognition by filing Form 1023 (for 501(c)(3) organizations) or Form 1024 with the IRS. Once approved, the organization receives a determination letter confirming its exempt status and is assigned an Employer Identification Number (EIN). Tax-exempt organizations are not exempt from all taxes: they must still pay payroll taxes on employee wages and may owe unrelated business income tax (UBIT) on revenue from activities not substantially related to their exempt purpose. The most common designation is 501(c)(3), which covers charitable, religious, educational, and scientific organizations and provides the additional benefit that donations to these organizations are tax-deductible for donors. Other common exemptions include 501(c)(4) for social welfare organizations and 501(c)(6) for business leagues. Maintaining tax-exempt status requires annual filing of Form 990 and adherence to restrictions on political activities, private inurement, and mission-related operations. Loss of exempt status can occur if the IRS determines the organization no longer operates exclusively for its stated exempt purpose.