Reasons for Tax-Exemption

Why are nonprofit organizations tax-exempt?

All nonprofits are exempt from federal corporate income taxes. Most are also exempt from state and local property and sales taxes. Nonprofits are, of course, not exempt from withholding payroll taxes for employees, and they also are required to pay taxes on income from activities that are unrelated to their mission.

Here are some of the reasons why nonprofit organizations are tax-exempt and why it makes sense to preserve these tax-exemptions:

  • Nonprofits relieve government’s burden. Private schools and hospitals, day care centers, homeless shelters, and other nonprofits provide services that government might otherwise be required to offer. Through tax-exemptions, governments support the work of nonprofits and receive a direct benefit.
  • Nonprofits benefit society. Nonprofits encourage civic involvement, provide information on public policy issues, encourage economic development, and do a host of other things that enrich society and make it more vibrant.
  • Taxing nonprofits would be difficult and counterproductive. Determining what qualifies as taxable income would be extremely difficult according to many economists. The adverse effects of taxation on the viability and effectiveness of many nonprofits would be counterproductive and cost more to the community than the taxes it would generate.
  • Exemption for religious nonprofits preserves separation of church and state. Tax-exemption limits government’s ability to use tax policy to influence religious choices.

Excerpted from “What You Should Know About Nonprofits” a joint project of Board Source and Independent Sector .