Tax-Exempt Organization
What does "Tax-Exempt Organization" mean in law?
A tax-exempt organization is an entity that qualifies for exemption from federal income tax under IRC Section 501, most commonly Section 501(c)(3), which covers organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes. To maintain exemption, the organization must not allow its net earnings to inure to the benefit of any private individual, must not engage in substantial lobbying activity, and must not participate in political campaigns. Even exempt organizations are subject to the Unrelated Business Income Tax (UBIT) under Sections 511-514 on income from regularly carried-on trade or business activities not substantially related to their exempt purpose. The distinction between public charities and private foundations under Section 509 carries significant regulatory and operational consequences.
Definition
A tax-exempt organization is an entity that qualifies for exemption from federal income tax under IRC Section 501, most commonly Section 501(c)(3), which covers organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes. To maintain exemption, the organization must not allow its net earnings to inure to the benefit of any private individual, must not engage in substantial lobbying activity, and must not participate in political campaigns. Even exempt organizations are subject to the Unrelated Business Income Tax (UBIT) under Sections 511-514 on income from regularly carried-on trade or business activities not substantially related to their exempt purpose. The distinction between public charities and private foundations under Section 509 carries significant regulatory and operational consequences.
Example
A nonprofit hospital organized under Section 501(c)(3) is exempt from federal income tax on its hospital operations, but must pay UBIT on income from its parking garage that serves the general public, because that activity is not substantially related to its charitable mission.