Nonprofits and Tax Policy

Nonprofit organizations are able to better accomplish their missions through exemption from state and federal taxes. This allows nonprofits to maximize their impact and donor resources; it also promotes giving to nonprofits through tax-based incentives that are extended to donors. In this way, more dollars are free to be put toward supporting the organization and its mission rather than ending up somewhere other than donors intended.  Although a seemingly straightforward policy, nonprofit tax-exempt status can be confusing at times. In some instances, it is directly undermined by local governments in an attempt to collect resources from nonprofit organizations. 

Tax Exemption

Nonprofit tax-exempt status qualifies organizations for exemption from federal and state income, property, and in some states, sales taxes. Organizations that qualify for tax-exempt status are those that operate exclusively for charitable, scientific, religious, or public safety purposes and distribute all income to these purposes or to another charitable organization that accomplishes those purposes. The purpose of a nonprofit designation, instead of operating as a for-profit organization, is that it allows groups to readily raise money by incentivizing giving. The lack of taxation also allows groups to maximize the funds they receive. The incentives directed toward donors are also tax-relief policies.

Tax exemption not only applies to the nonprofit itself in order to promote the maximization of resources, but it also extends to the individuals or groups giving to nonprofits who are eligible to receive certain tax relief benefits. Federal and state tax policy incentivizes giving to nonprofits from individuals and businesses by providing an itemized deduction or tax credit for donations. Additionally, the federal estate tax encourages many wealthier individuals to give or make planned giving to community nonprofits. While these incentives work and many donors take advantage of them, some nonprofits are calling for new and improved tax-based incentives such as universal deductions or a non-itemizer in hopes of making donating even more attractive to financially savvy individuals. 

Can Nonprofits Ever Be Taxed?

Despite federal and state tax policies promoting tax-free operation for nonprofits, some municipalities attempt to impose undue taxes and fees on nonprofits, often discriminating against certain nonprofits. In 2011, mayors in Chicago, Boston, and New Orleans attempted to levy taxes against nonprofits in several ways. Municipalities are self-governing apparatuses but are still subordinate to state and federal law. This type of rebellious behavior is not uncommon in municipalities, especially in the absence of explicit state or national preemptions. For nonprofits, these undue costs materialize in three forms: taxes, fees, and Payments in Lieu of Taxes (PILOTs). Losses in monetary reserves often result in a direct loss in impact and services rendered; for this reason, the tax status of nonprofits must be respected if communities expect the essential services these organizations provide. There are also instances in which a nonprofit’s behavior makes them liable for taxation in the form of Unrelated Business Income Taxes (UBIT). This occurs when nonprofits earn an income from activities or services that are unrelated to their exempt purposes (typically some commercial activity) and this earning must be ongoing (i.e not a fundraiser).

In order for nonprofits to maximize their impact and accomplish their mission, the tax-exempt status and the incentives linked to it must be preserved. This exemption motivates donors to give and allows organizations to maximize those funds that are received. When it comes to essential health and social services, even helping one more person can be truly life-changing. The services and economic impact examined in the last blog show that nonprofit organizations are pillars in communities across the United States. Allowing them to continue improving lives and communities while providing economic growth is important to everyone across the nation. 

Through the combination of industry know-how and a data-focused approach, the NMBL team can maximize your organization’s impact and drive its mission forward. Reach out to us today to learn more about what we can do for you.