From the outside, nonprofit taxes can seem confusing. Even nonprofit business owners may be unclear about the specifics of their organization’s tax requirements. If you’re starting or running a nonprofit, you might be asking: do nonprofits pay taxes?
The short answer: sometimes. The details depend on your activities, business purpose, state and city requirements, and the specific type of nonprofit under federal tax law. There are 27 types of nonprofits recognized by the IRS, and while most receive tax benefits, some do owe certain taxes.
What Are Common Nonprofit Tax Exemptions?
The most common type of nonprofit is the 501(c)(3), which enjoys several tax benefits:
- Federal income tax exemption – Most 501(c)(3) nonprofits are not required to pay federal income taxes.
- State income tax exemptions – Often recognized with the IRS “letter of determination” submitted to your state’s Department of Revenue
- Sales and property tax exemptions – Many nonprofits qualify, though this varies by state.
To retain these benefits, nonprofits must meet specific IRS criteria, including restrictions on private benefits and political activity.
How Do Nonprofits Maintain Tax-Exempt Status?
Maintaining tax-exempt status requires ongoing diligence. A 501(c)(3) must operate for purposes such as educational, religious, charitable, scientific, literary, public safety, or preventing child/animal cruelty. To stay compliant:
- Ensure profits do not go directly to private individuals or corporations.
- Stick to your stated mission; avoid unrelated business income.
- Avoid political contributions or public support of candidates.
- Follow generally accepted accounting principles (GAAP) and consider hiring a CPA for annual audits.
- File IRS Form 990, 990EZ, or 990-N if your gross receipts exceed $200,000 per year.
Which Taxes Might a Nonprofit Still Pay?
Even tax-exempt nonprofits may have certain obligations:
- Unrelated business income tax (UBIT) – If your nonprofit earns money from activities outside its mission.
- Payroll Taxes – Social Security, Medicare, and possibly state unemployment taxes for employees.
- State-Specific Fees – Some states charge registration or reporting fees to maintain tax-exempt status.
What Is Form 990 and Why Is It Important?
Most nonprofits (excluding religious and certain political organizations) must file IRS Form 990, 990EZ, or 990-N. This form provides a public snapshot of:
- Revenues and expenses
- Assets and liabilities
- How funds are spent in support of the nonprofit’s mission
Filing Form 990 accurately is essential for transparency and maintaining donor trust.
How Can a CPA Help Your Nonprofit With Taxes?
Navigating nonprofit tax requirements is complex, and mistakes can cost your organization its tax-exempt status. The Cg Team has over 40 years of experience helping nonprofits stay compliant.
Our CPAs can:
- Manage IRS and state filings
- Conduct audits and internal reviews
- Provide guidance on unrelated business income
- Ensure ongoing GAAP compliance
With professional accounting support, you can focus on your mission while avoiding penalties and costly mistakes.
Ready to Simplify Your Nonprofit’s Taxes?
Don’t let confusion over nonprofit taxes slow your organization down.
Call the Cg Team at 732-676-4100 or contact us today to learn how our expert CPAs can help you maintain tax-exempt status, streamline accounting, and ensure long-term financial success.
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