Non Profit or Exempt? What’s the Difference?

Christian Shaeffer Exempt Non-Profit Organizations Leave a Comment

Often times, the terms non profit and exempt are used to describe organizations with a mission to serve a certain purpose (often charitable).  While most non profit organizations (NPO) are exempt, it’s important understand the terms because they both have difference meanings.

Non profit status is a State concept and is regulated at the state level.  According  to Montana Secretary of State website, Non profit organizations (often times set up as a corporation) are established solely for the benefit of charitable, religious, educational, or scientific purposes. No earnings are distributed to members, trustees, officers, or other individuals, except for compensation for services rendered. 

Just because an organization is organized and recognized at the state level as a non profit does not automatically mean the organization is exempt from federal income tax.  Exempt status is a federal term use by the IRS to describe certain organizations that are exempt from federal income tax (on income generated form it’s exempt purpose).  Many NPO’s file IRS form 1023 in order to apply for tax exempt status under 501(c)(3) of the Internal Revenue Code.  Assuming the IRS approves the application, the NPO will receive the all important Determination Letter.

It’s important to note, while an organization may be a non profit, it doesn’t mean it’s precluded from earning a profit.  (more about the differences between an NPO and for profit organization can be found in a later post).   Further, the IRS allows tax exempt organizations to engage in certain income producing activities (tax free) even though they may be unrelated to the organization’s exempt purpose.  However, without certain conditions being met, these activities may be subject to unrelated business income tax.

There are many other points and considerations surrounding these concepts.  Please be sure to consult a CPA or attorney concerning your specific questions.

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