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Nonprofits Tax Burdens & Types Explained – What You Need to Know

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If you’re about to embark on a nonprofit mission to save even one square foot of your world, congratulations! Nonprofit organizations really can make a difference, and deciding to be a part of that difference is commendable. But if you’re not careful, your noble mission could end prematurely. Starting a nonprofit may be more challenging than it appears at first blush.

Here are the basics for starting your nonprofit and making the change you want to see in the world.

Tax Exemptions

Let’s get down to brass tacks concerning the tax exemptions for nonprofit organizations. It’s well known that nonprofits don’t pay certain taxes. But state and federal authorities may not provide blanket protection from taxes depending on your source of funding, stated mission, or other extracurricular advocacy.

As a general guide, nonprofit organizations are exempt from:

  • Federal & state income taxes
  • Federal unemployment tax
  • Tax from monetary contributions
  • State sales and employment taxes (in certain cases)

Depending on the type of nonprofit you choose and how your funding is gathered and spent, your organization may not be exempt from:

  • Employee medicare tax
  • Employee social security tax
  • Excise taxes on large endowments
  • Political action taxes
  • Over $1,000 in unrelated, business income taxes

The type of nonprofit you choose to start and how you secure and use its operating funds can make a major difference in the taxes you pay. If you plan on receiving large endowments, contributing money for political purposes, or spending your funds in a way not directly related to your stated mission, you may end up paying taxes on those funds. 

Types of Nonprofits

Before your mission begins, it’s important to clarify what that mission is, who it serves, and how you’ll fund it. The type of nonprofit you choose will ultimately be determined by your purposes and—in clearer terms—the goals and breadth of your outreach. There are many types of nonprofit organizations. Below are a few examples. 

Public Charities

Most of us are familiar with 501(c)(3) public charities. Public charities are exempt from taxes for specific, stated purposes such as eliminating hunger in the homeless population or providing clothes for lower-income families. Public charities can have any number of motivations for the assistance they’re providing and can be founded on religious, educational, charitable, or even scientific principles.

Some examples of public charities include:

  • Educational organizations (schools)
  • Museums
  • United Way
  • Red Cross


On average, foundations are usually started by wealthy individuals or organizations who want to use their status and money to encourage special initiatives. Foundations rely on investments and endowments to promote their causes and must spend a certain percentage of their income each year to continue operating as a nonprofit. Additionally, foundations are considered to be 501(c)(3) organizations.

Foundations are broadly prohibited from contributing to political campaigns and most other political activity, but they may donate funds to organizations that engage in or promote political lobbying efforts. 

Some examples of foundations include:

  • The Bill & Melinda Gates Foundation
  • The Robert Wood Johnson Foundation
  • The William & Flora Hewlett Foundation

Civic Leagues/Social Welfare Organizations

For some, the 501(c)(4) organizational structure may make more sense, especially if you’re planning on being more politically active. Unlike 501(c)(3) organizations, 501(c)(4) organizations are permitted to participate in lobbying efforts and even support individual pieces of legislation. 

Civic leagues and social welfare organizations can be as local as a group of law enforcement officials advocating for municipal legislation or as national as the AARP. The scope is up to the individuals in charge of forming the organization.

Some examples of civic leagues/social welfare organizations include:

  • The AARP 
  • The ACLU
  • Catholics United

The above list of examples of nonprofit organizations is far from exhaustive. Other types of nonprofit organizations are exempt from certain taxes, including 501(c)(6) organizations (business leagues, chambers of commerce, real estate boards, etc.) and 501(c)(7) (social and recreational clubs).

Not for Profit

Tax exemptions for nonprofit organizations can vary wildly depending on your IRS designation, your stated mission or purpose, and your participation in politics. Depending on these three vital distinctions, you may need some greater consideration and expert guidance to get your organization started. 

To make the change you hope to make, you need to choose the right kind of organization for your purposes. There are numerous other types of nonprofits, and choosing the right one can sometimes feel daunting. Don’t be afraid to ask for a little help on your way to providing help yourself! Ask an expert so that you can get down to business—the business of making our world better.

To discover the perfect nonprofit org for you, Contact Aldridge Borden 

Nonprofits are all about extending a helping hand without the expectation or distraction of profits. But before your organization gets off the ground, you’ll need to understand your mission, your tax burdens, and your political aspirations first. To learn more about the types, tax burdens, and political limitations of certain nonprofit organizations, call in a helping hand from Aldridge Borden at (334) 834-6640!

Aldridge Borden’s Nonprofit experts, Jessica Hudson (L) & Amanda Hines (R)

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