What Taxes Do Nonprofits Pay?

Tax-exempt. What exactly does that mean?

If you’re part of a nonprofit, you may ask questions like: What taxes are nonprofits exempt from? When do nonprofits pay taxes and when do they not? In this article, we have tried to provide you with the best possible answer.

With some exceptions, all nonprofits are subject to the same federal tax rules. The details of what taxes nonprofits pay lie in Unrelated Business Taxable Income (UBTI).

Your organization has a “tax-exempt purpose.” All income generated from activities “substantially related” to that purpose are tax exempt. You’re permitted to raise a reasonable amount of funds from “unrelated activities,” but that income – UBTI – is taxable.

Before we cover UBTI, Standard federal tax exemptions cover:

  • Federal income taxes. 
  • Donations are tax-deductible for donors.
  • Federal unemployment tax
  • Taxes on financing
  • Reduced postal rates

State tax exempt benefits vary by state, but most include: state and local property taxes, state income tax, and sales tax on purchases.

So the first umbrella, income related to your exempt purpose, is relatively simple. 

Under the second umbrella, Unrelated Business Taxable Income, there is a long set of rules used to determine what income is taxable and what is tax exempt. These rules have been buried deep within the Internal Revenue Code and other IRS publications. Until now. 

The IRS’s main source of this information is its Publication 598, which in turn is largely an explanation of section 512 of the Internal Revenue Code. We hope this article will be an even more accessible source of this information.

With no further ado, here is your comprehensive reference tool for nonprofit taxes and UBTI.

 

Unrelated Business Taxable Income (UBTI) 

Rules of Tax Exempt Status

[TABLE OF CONTENTS]

—General Information—

—Specific Rules on Unrelated Business Taxable Income (UBTI)—

Considerations by Type of Tax Exempt Organization

*(e.g., 501(c)(1), 501(c)(3), etc.)

General Information

Tax Exempt Status

  • Exempt Purpose: In order for your nonprofit to become tax exempt, it must be registered with the IRS under a specified exempt purpose (or “organized for charitable purposes” – usually your mission statement).
    • Standard exempt purposes for 501(c)(3) include: educational, religional, scientific, literary, testing for public safety, fostering national or international sports competition, and preventing cruelty to animals or children.
    • Tax exempt purposes for other 501(c) designations include the organizing of groups around common goals, activities, and benefits related to recreation, professions, shared resources (e.g. financial or utilities), and more.
  • 501(c)(1): These organizations, established by acts of Congress, are not subject to these rules and pay very few taxes at all.
  • Employees Pay Taxes: Though an organization is tax exempt, its employees must pay most federal income tax from their paychecks, including Social Security and Medicare (though, in most cases, not federal Unemployment tax).

Key Terms:

  • “Substantially Related Activities”: Or, in this article, “related activities.” All income generated by activities deemed “substantially related” to your organization’s exempt purpose benefit from the federal tax exemptions listed above.
  • “Unrelated Activities”: In IRS tax exempt language, and in this article, “unrelated activities” refer to all those not “substantially related” to your tax exempt purpose.
  • Unrelated Business Taxable Income: All UBTI is subject to federal taxation, according to the rules detailed below.

Unrelated Business Taxable Income

  • Fundraising ≠ “Related Activity”; Just because funds raised from an activity go toward your exempt purpose, doesn’t mean the activity itself is related and tax exempt. (However, the income may be tax exempt if the activity is run entirely by unpaid volunteers.)
      • Ex: If your organization’s exempt purpose is to prevent cruelty to animals, and you make extra income to support that cause by providing pet grooming, then that income will be taxable as UBTI.
  • UBTI Activities are Ongoing: Generally, UBTI rules apply to unrelated activities that are ongoing, or on a regular recurring basis (weekly, monthly, or annual). One-time fundraisers are usually tax exempt.
  • Prohibited Unrelated Activities: Some unrelated activities, such as involvement in a political campaign, are banned and will result in a loss of tax exempt status.
  • Excessive UBTI: If unrelated business income is an excessive portion of a nonprofit’s total income, it could result in the loss of tax exempt status. There is no set percentage defined as “excessive,” and this is assessed on a case-by-case basis.
  • Tax Filing: UBTI is reported on a separate tax form, Form 990-T
    • Annual tax returns on UBTI are due on May 15th (except for 401(a) organizations, which file by April 15th)
    • At certain levels, UBTI must be reported quarterly.
  • Separate IRS Forms: If your organization has multiple forms of unrelated business income, each amount must be calculated separately on your Form 990-T. The sum is your organization’s total UBTI.
  • Deductions: For the most part, deductions are allowable for UBTI reported on Form 990-T, as they would be allowed for income of a for-profit business.
    • UBTI losses are not deductions: However, if one source of unrelated business income yields a loss, that loss is not subtracted from the total UBTI from all unrelated income sources.
  • Purpose of UBTI: The UBTI rule was established by the US Congress in 1950 (and modified several times since) to eliminate abuse of nonprofit tax advantages.

Specific UBTI Rules

Membership-Based Income

  • Membership Dues – Several types of 501(c) organizations are membership-based, with those members paying dues. If those members are actively involved in the organization’s exempt purpose, then the organization pays no taxes on the income derived from dues. However, if those members are not active participants but receive insurance and benefits (usually for 501(c)(5) and 501(c)(6) organizations), then the income is likely considered UBTI and is taxable.
  • The convenience of MembersTax Exempt According to the IRS, “A trade or business conducted by a 501(c)(3) organization or by a state college or university primarily for the convenience of its members, students, patients, officers, or employees isn’t an unrelated trade or business.” So income from such activities is not taxable.
      • Ex: A laundry room in a college dormitory provides convenience to its students, so any income from use of the machines is tax exempt.
  • Exchange of Member Lists Tax Exempt – Profit from the sharing of member lists, for the purpose of soliciting donations, is not considered UBTI and is therefore tax exempt.
  • 501(c)(12)Tax exempt – Income from memberships to 501(c)(12) co-op utility providers is not considered UBTI and is tax exempt.
  • Services to General PublicTaxable – If your organization’s exempt purpose is to serve its members in some way and you make the same services available to the general public for a profit, then those profits are generally taxable as UBTI.

Fundraising Events

  • Volunteer-Run FundraisersTax Exempt – See above, “Fundraising ≠ Related Activity”. An exception to this rule exists when a fundraising event is run entirely by volunteers. Income from such events is likely tax exempt. Unrelated fundraisers are subject to taxation if they are run in part by paid employees.
  • Trade ShowsTax exempt situation – Most income from trade shows (e.g. attendance fees) is tax exempt for 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6) organizations, if trade shows are a regular activity of your organization (typically at least annual) and the event is substantially related to the organization’s exempt purpose.
    • Display SpaceTaxable However, income from exhibitors’ rental of display space is considered taxable UBTI.
    • Live Streaming of Trade Shows – These rules are extended to any live information disseminated or streamed online as part of a trade show event, as long as it takes place on its own segmented section of your organization’s website.
  • Fairs and Exhibitions – Rules applying to fairs and exhibitions are similar to those for trade shows.
    • Public Entertainment ActivityTax Exempt – Games and entertainment activities at fairs and exhibitions are not considered unrelated business, because they are designed to attract more people to the event, so income they generate is not considered UBTI and is likely tax exempt.
  • Bingo GamesTax exempt – This one is interesting. Income raised through bingo games is generally considered tax exempt, regardless of your organization’s exempt purpose, as long as they aren’t illegal under a state’s gambling laws or take place in a jurisdiction where bingo is regularly conducted by for-profit organizations.

Merchandise and Sales of Items

    • MerchandiseTaxable – Income derived from the sale of small items is considered UBTI (taxable) unless:
      • Production is related to exempt purposeTax Exempt – The sale of any product that is produced through your organization’s exempt purpose is tax exempt as long as it is not altered after the fact (see example 2 below).
        • Ex 1: If knitting hats is part of a rehabilitation program, any income from sales of those hats is tax exempt; but if there are sales of additional hats made by the general public (not by individuals in the rehab program), then that income is likely considered UBTI  and is taxable.
        • Ex 2: If a tax-exempt organization does research on dairy cows, then sale of the milk produced through the regular course of operation is tax exempt. But if that milk is made into butter or ice cream, and that activity does nothing to further the organization’s mission, then those sales are likely taxable as UBTI.
      • Donated MerchandiseTax Exempt – Income from the sale of donated items, such as clothes at a thrift store, is typically tax exempt and not considered UBTI.
      • Gift Shops – Consider an art museum gift shop, or similar vendor

 

  • Taxable if – All related items (e.g. post card with museum art on it) are tax exempt)

 

      • Tax Exempt if – All unrelated items (e.g., snacks and drinks)
    • “Minimum Suggested Donation” items
      • Taxable if – Income from any item given in exchange for a donation that costs the organization (not the customer) more than a certain amount to obtain (based on $5 in 1987; the amount was $11.10 in 2019) is taxable. 
      • Tax Exempt if – Revenue from items that cost less than this amount are tax exempt, so long as they are allocated toward the organization’s stated purpose.
    • Food Courts and Concessions StandsTax Exempt – Generally, the provision of food, especially in large facilities like theatres, hospitals, and museums, is considered related to an exempt purpose (and tax exempt) if it helps patrons and employees stay on site for a longer time and therefore furthers the organization’s impact.

Advertising and Sponsorships

  • Advertising  –Taxable – In most cases, income related to advertising is considered unrelated to an organization’s exempt purpose and taxable as UBTI, unless the advertisement advances the organization’s mission.
      • Ex: If your organization’s exempt purpose surrounds legal advocacy and you publish a quarterly pamphlet, then income from advertisements in the pamphlet is not tax exempt solely because the pamphlet furthers your mission. If the advertisement itself furthers your mission, such as promotion of an educational event on legal professions, then income from that one advertisement is likely considered related and therefore tax exempt.
    • SponsorshipsTax exempt – An exception to this rule exists for sponsorships, when the only publicity given is the sponsor’s name and/or logo (without information about products or services).
      • At Trade ShowsTaxable – If a sponsorship takes place at a trade show (see below), it is considered an advertisement, and income it creates is taxable as UBTI.
      • In PeriodicalsTaxable – If a sponsorship is placed in a periodical (regular publication, e.g. monthly or quarterly), it is considered an advertisement and income it creates is taxable as UBTI.
      • Segmenting Ads and Sponsorships – A supporter may place a taxable sponsorship and a tax exempt advertisement, as defined above, in two separate instances with your organization as long as the two amounts are paid separately, in reasonable proportion to their respective value.
    • Endorsements: – Taxable. – Endorsements are distinguished from sponsorships, considered advertisements, and are generally taxable as UBTI. If your organization enjoys a high reputation, and uses that reputation to sell endorsements (even if to companies related to your cause), then income derived from them is likely taxable as UBTI.

Rental Income

If income is derived from rent on real property, then taxation depends on the renter’s relatability to your organization’s tax exempt purpose. Some considerations are:

  • Above ThresholdTax exempt – If 85% or more of the property is used directly for exempt purposes, then all the income generated from the property is excluded from the UBTI rule and is tax exempt.
  • Below ThresholdTaxable If less than 85% of the property is used for the exempt purpose, then income relative to the portion used for unrelated purposes is taxable (e.g., if 20% of the property is used for unrelated business, 20% of the property’s income is taxable).
  • Rental Business as an Exception to Other RulesTax Exempt – A related activity can be deemed unrelated if it is made available to the general public (not only members or usual beneficiaries). However if that same activity, available to the public, is performed by another party who rents or leases your facility, the income may remain tax exempt because it is considered related rental income.
      • Ex: A college operates tennis courts for its student teams, an activity related to its exempt purpose. During the summer, the college’s employees run a tennis camp, open to the general public, for a fee. Income from this camp is likely taxable as UBTI because it doesn’t serve the college’s students. However, if the same camp, open to the public, is run by another party who rents the facility, it is tax exempt because teaching tennis is a related activity and rental income doesn’t have to come from serving members or students.
  • Income from Financed PropertyTaxable – If the ownership of the property is debt-financed (such as through a mortgage) and its use isn’t directly related to the exempt purpose, any income is taxable as UBTI (see below).
  • Renting Personal PropertyTaxable – Income from the rent of personal property (assets), as opposed to real property (facilities) is taxable as UBTI, unless it furthers your organization’s exempt purpose.
    • Above High ThresholdTaxable – If more than 50% of a single rent payment is for personal property, as opposed to real property, then the entire amount is taxable as UBTI unless it furthers your organization’s exempt purpose.
    • Below Low Threshold Tax exempt – If less than 10% of a rent payment is attributable to personal property, then the entire amount is treated as real property, not considered UBTI, and is tax exempt.
    • Between Thresholds – If more than 10% but less than 50% of a rent payment is attributable to personal property, then the percentage that is considered to be for personal property is taxable as UBTI and the rest is tax exempt.
  • Service providedTaxable – If substantial personal service is provided to lessees (sufficient to consider that their payments are not only for rent) then the income is generally taxable as UBTI.
      • Ex: Taxable – In the above tennis camp example, income is tax exempt when facilities are rented to an outside group to run the camp. However, if you provide services, such as paying employees to assist in the camp, then income is considered more than merely rental, and therefore doesn’t enjoy this exception to UBTI (i.e., income is taxable).
      • Ex: Tax exempt Your organization is a rehabilitative boarding home, and residents with the financial means pay rent to stay in your facilities. Services you provide, such as food and rehabilitative programming, are directly related to your exempt purpose, and therefore this rental income is tax exempt.
  • Exceptions for Certain Exempt StatusesTax Exempt – See below, special rules for 501(c)(7), 501(c)(9), or 501(c)(17).

 

Other Facilities and Property-Based Income

  • Unrelated Use of Assets or Facilities Taxable – Income from use of facilities is likely taxable as UBTI if it does not relate to your organization’s exempt purpose.
      • Ex: Taxable – If you operate a nonprofit theater and acting company, then proceeds from all plays is likely tax exempt. If you show a movie in your theater once a week and sell tickets to the general public, then income from those tickets is likely considered unrelated to your purpose and taxable as UBTI.
        • Tax Exempt Exceptions However, income might remain tax exempt if the event is: run entirely by volunteers (see above “Employee- vs. Volunteer Run”) or available only to members of the theater.
  • Sale of PropertyTax Exempt – Income from the “disposition” (or sale) of property is generally excluded from UBTI and is tax exempt.
    • Property acquired to be sold Taxable The above rule does not apply if property is bought and held with the primary intent of being sold for a profit. Such activity is usually considered an unrelated business, and its income is taxable as UBTI.
    • Debt Financed Property Taxable Income from the sale of property is taxable if it was owned under a mortgage or other debt (see below).

Income from Financed Property or Assets

 

  • Debt Financed IncomeTaxable – Any income from a source that is controlled under debt – such as property with a mortgage, assets bought on a payment plan, etc. – is considered UBTI and is taxable. 
    • Taxes Relative to Unpaid Portion – This pertains to the extent that the debt is paid off. For example, if half of a mortgage is paid on a property, then half of the rental income from the property is taxable as UBTI and the other half is tax exempt.
    • Include Financed Renovations – This includes property for which a loan was taken out to do renovations.
    • Exceptions to this rule include:
      • Exception for Property Acquired as a GiftTax Exempt – If the property was received as a gift or part of a will, it is taxed (or not) as if wholly owned. This rule applies for 10 years from the date the property was gifted, as long as: 1) the mortgage had been in place for at least 5 years prior to gifting, and 2) the previous owner owned the property for at least 5 years.
      • Exception for 501(c)(12) organizationsTax Exempt – These organizations may treat debt financed property, for tax purposes, as if it is wholly owned.
      • Property Substantially Related to Exempt PurposeTax Exempt – If 85% or more of any property’s activity is substantially related to an organization’s exempt purpose, then its income is tax exempt.
      • Additional ExceptionsTax exempt – Income from debt financed property may be tax exempt if it is run entirely by volunteers, it exists for the convenience and benefit of its members (see “Membership-Based Income” above), or it exists for the sale of donated merchandise (such as a GoodWill store).

Miscellaneous UBTI Rules

  • Gaining Tax Exempt StatusTaxable – If a taxable corporation obtains tax exempt status, all of its assets are taxed one time as if they are being sold. This rule doesn’t apply if tax exempt status is obtained within three years of the organization’s formation, or within three years of previously losing tax exempt status.
    • If a portion of assets is going to be used for an unrelated trade or business, that portion is not subject to this one-time tax, but it continues to be taxed ongoing according to the rules of UBTI.
  • Travel and Tour Programs: If your nonprofit organization generates income by providing travel, tours, or similar services to its members, that income is taxable, unless the services directly further the mission of the organization (e.g., they are designed as educational programming).
  • Investment IncomeTax Exempt Income from dividends, interest, annuities, payments on security loans, and other income from your organization’s “ordinary and routine investments” is not considered UBTI and therefore is tax exempt.
    • Debt FinancedTaxable – Any investment income that is financed by a loan or other debt is considered taxable as UBTI.
  • ResearchTax Exempt – Income from conducting research, if done by a college, university, or hospital, or done for the United States government, is generally not considered UBTI and is tax exempt.
  • RoyaltiesTax exempt – Income from royalties is generally not considered UBTI and therefore is tax exempt.
  • Special rules for 501(c)(7), 501(c)(9), and 501(c)(17) – These organizations are respectively described as Social Clubs, Voluntary Employees’ Beneficiary Associations (VEBAs), and Supplemental Unemployment Compensation Benefit Trusts (SUBs). Generally, their tax situation is derived from section 512(a)(6) or the Internal Revenue Code.
    • Non-exemptions: In general, all income that is not related to these organizations’ exempt purpose is taxable as UBTI, without considering any of the above exceptions to UBTI rules. This means the rental income, investment income, and many other forms of income that would be tax exempt for other organizations are not tax exempt for 501(c)(7), (9), and (17) organizations unless the income is derived from activities substantially related to the exempt purpose.

Considerations by Type of Tax Exempt Organizations

 

Internal Revenue Code Designation Description / Notes Federal Tax and UBTI Considerations IRS Form
501(c)(1)

Tax exempt organizations established by Acts of US Congress

  • This is a flexible designation, allowing the US Congress to establish tax exempt organizations.
  • Includes Federal Credit Unions.
Exempt from all taxes (including those on UBTI) except: 

  • local real property taxes
  • personal property taxes
  • Federal Income Taxes
  • None
501(c)(2)

Property holding corporation, intended to hold property for a parent nonprofit organization, providing added legal protections to that property.

  • Income is directly contributed to a parent 501(c) organization.
  • Income from real property held under a 501(c)(2) organization may not exceed 10% of the income for the associated 501(c)(3) organization.
  • For the purposes of this tax status, “real property” may include personal property, as long as income from the personal property doesn’t exceed 15% of total income for the 501(c)(2) organization.
*See “Rent” section above.* Income tax is subject to the same considerations as the 501(c)(2)’s parent corporation, and is tied to the parent’s exempt purpose.

Exempt from:

  • Any rental income, paid to the parent organization, from a lessee who is related to the parent organization’s exempt purpose.

Not exempt:

  • Any rental income from a lessee unrelated to the parent organization’s exempt purpose

Other benefits of separate property holding:

  • In case of lawsuits against the parent nonprofit, the property held by a 501(c)2 organization may not be liable as damages. 
  • Enhanced ability for financing and borrowing
  • Accounting simplification
  • Only net income may be available to creditors, giving the organization more control over its finances.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(3)

Organizations dedicated to scientific, charitable, religious, educational, literary, or public safety activity. Organizations dedicated to promoting national or amateur sports, or to prevent cruelty to animals or children.

  • Most common type of nonprofit organization.
  • 501(c)(3) organizations must not participate in any political lobbying or attempt to influence any political campaign.
  • Includes most colleges and hospitals.
  • All standard tax and UBTI rules apply.
  • Most income from trade shows is tax exempt (see “Trade Shows” above).

Note: *Many large nonprofits, like colleges and hospitals, will make payments to municipalities in lieu of property taxes, because their presence incurs costs to localities, such as for policing and public works.

  • Tax filings: IRS Forms 990, 990-EZ, or 990-PF
  • Application for status: IRS Form 1023 or 1023-EZ
501(c)(4)

Social Welfare Organizations

  • Includes local employee associations whose proceeds go to recreational, educational, or charitable purposes.
  • Most income from trade shows is tax exempt (see “Trade Shows” above).
  • Income from sales of merchandise to members is tax exempt, if your 501(c)(4) organization was founded before May 17, 1969.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(5)

Horticulture, Labor, and Agricultural organizations.

  • 501(c)(5) organizations provide education, advocacy for working conditions, and support for work quality and efficiency for agricultural organizations.
  • They differ from 521(a) organizations in that 501(c)(5)’s do not provide services directly related to business or marketing to members.
  • Most income from trade shows is tax exempt (see “Trade Shows” above).
  • If the price for associate member dues (members not actively involved) exceeds $169 (in 2019), then income from them is taxable as UBTI.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(6)

Organizations designed to improve business conditions for members.

Includes Business Leagues, Boards of Trade, Chambers of Commerce, Real Estate Boards, Professional Associations, and nonprofit american football leagues.

  • Typically funded by member dues.
  • Permitted to engage in political activity.
  • Application for 501(c)(6) status is done through IRS Form 1024.
  • Most income from trade shows is tax exempt (see “Trade Shows” above).
  • Dues from members who are not actively involved in the organization’s activities (but who receive a service or benefit) are taxable.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(7)

Recreational and Social Clubs. Includes hobby organizations, nonprofit sports clubs, country clubs, and more.

  • Unrelated business income is typically derived from nonmembers, with certain modifications (see section IRC 512(a)).
  • Rental income from real property is taxable.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(8)

Fraternal Beneficiary Societies and Associations operating under the lodge system, and providing benefits for members and their dependents.

  • 501(c)(8) organizations must meet two requirements:
    • operating under the lodge system, i.e., local branches under a parent organization, such as the Elks Club or Knights of Columbus.
    • provide some type of insurance (typically health or life insurance) in exchange for membership dues.
  • Permitted to be involved in political activity, though that cannot be the organization’s purpose.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(9)

Voluntary Employees Beneficiary Associations

  • Provides benefits such as healthcare or worker’s compensation
  • Membership must exist under a common employer or union.
  • Unrelated business income is typically derived from nonmembers, with certain modifications (see section IRC 512(a)).
  • Rental income from real property is taxable.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(10)

Domestic Fraternal Societies and Associations operating under the lodge system (not providing member insurance or similar benefits)

  • 501(c)(10) organizations are similar to 501(c)(8) orgs, as they operate under the lodge system (local branches under a national organization)
  • However, member dues to 501(c)(10) organizations go toward social and recreational purposes, and not toward benefits for members.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(11)

Local Teacher’s Retirement Fund Associations

  • Income may only be derived from taxes, contributions from teacher salaries, and investments owned by organizations.
  • Application for this status is done through IRS Form 1024
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(12)

Local, mutual benefit organizations. Includes: Benevolent Life Insurance Associations, Mutual or Cooperative Telephone Companies, Mutual Ditch or Irrigation Companies, Etc.

  • Often provides a public utility such as electricity or phone service, organizational as a cooperative. 
  • At least 85% of income must come from membership contributions. Some income is exempt from this rule for certain services, under IRC section 501(c)(12)(B) through (J).
  • Income from qualified rental of utility poles and similar structures is not considered UBTI and is thus tax exempt.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 
  • 1024
501(c)(13)

Cemetery Companies. Organizations designed for respectful burial and cremation without the goal of profit.

  • Income commonly derived from membership dues and donations.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(14)

State Chartered Credit Unions, Mutual Reserve Funds

  • Organizations are owned cooperatively by members.
  • Income is derived from interest on loans, membership dues and account fees.
  • Profits must be reinvested back into the organization or distributed as dividends to members.
  • Nonprofit structure and tax exemptions typically lead to lower interest rates for members.
  • No application form (such as Form 1024) is required for this nonprofit status.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: Not required
501(c)(15)

Mutual Insurance Companies or Associations, excluding Life Insurance, often providing insurance for property damage and funerals.

  • Membership is usually restricted by municipality or county.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(16)

Cooperative Organizations to Finance Crop Operations. 

  • Typically, members are farmers in a local area whose contributions go toward farm equipment, livestock, crop cultivation, or other business activities related to agriculture, for the mutual benefit of the group.
  • Organizations may hold stock, though its dividends may not exceed their State’s legal rate or 8 percent per year (whichever is greater).
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(17)

Supplemental Unemployment Benefit Trusts.

  • These are trusts maintained by employers and employees to create reserves for unemployment compensation, in case of layoffs from company downsizing or an employee inability to work due to sickness or disability.
  • Allocation of funds for any other purpose will lead to loss of nonprofit status.
  • Any discrimination in favor of highly-paid employees will lead to loss of nonprofit status.
  • Unrelated business income is typically derived from nonmembers, with certain modifications (see section IRC 512(a)).
  • Rental income from real property is always taxable.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(19)

Employee-funded Pension Trusts

  • Applies only to organizations formed before June 25th, 1959.
  • Income is derived exclusively from member contributions.
  • Distributions are solely for the benefits of members.
  • Discrimination in favor of highly-paid employees will lead to a loss of tax exempt status.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
Organizations for Veteran or Active Members of the U.S. Military
  • Seventy-five percent of members must be active military members or veterans. The majority of remaining members must be spouses, descendents, or other relatives of military members and veterans.
  • Income set aside – Tax exempt – 501(c)(19) organizations may set aside insurance payments for future use toward their exempt purpose, without paying taxes on it (unlike most 501(c) organizations).
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024

 

 

501(c)(20)

Group Legal Service Organizations. 

*no longer a tax exempt status.

  • Provides legal services to members.
  • This status was eliminated in 1992. Many formally qualifying organizations choose other tax exempt statuses, usually 501(c)(9).
  • All standard tax and UBTI rules apply.
  • N/A
501(c)(21)

Black Lung Act Trusts. Organizations providing benefits declared as rights under the Federal Black Lung Benefit Act of 1969.

  • Income is derived from contributions from coal mining companies.
  • Beneficiaries are coal miner workers and their families.
  • All standard tax and UBTI rules apply.
  • IRS Form 990-BL used for tax filing and application for status.
501(c)(22)

Multi-Employer Pension Funds. Funds maintained by a group of employers, designed to help employers meet their obligations for pension payments.

  • Contributions (income) must be made by employers who are members of the organization.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(23)

Veterans Organizations established before 1880. 

  • A main purpose must be to provide insurance to military veterans and their dependants.
  • Income derived from donations and government grants.
  • 75% of members must be current or past members of the U.S. military.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
501(c)(24)

Employee Trusts organized under ERISA Act.

  • ERISA Act of 1974 was passed to protect employee pensions and health benefit plans.
  • Income is derived from employer and employee contributions.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
501(c)(25)

Real property title holding trust or corporations, for properties whose shareholders are a small group of other tax-exempt organizations.

  • Similar to 501(c)(2) organizations, but enacted (in the Tax Reform Act of 1986) to empower groups of small nonprofits to join together to create the same benefits as large nonprofits are able to attain.
  • Can have no more than 35 beneficiaries or shareholders.
  • Shareholders may not be another 501(c)(25) organization
  • May treat income from debt financed property as if that property is wholly owned.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(26)

State-Sponsored Organization Providing Health Coverage For High Risk Individuals.

  • These organizations are organized on the state level, and provide coverage for citizens of their respective states.
  • Not all states have 501(c)(26) insurance providers. Some examples of states who do are NC, LA, and IN
  • Funding is derived from donations and government grants.
  • Members are individuals with preexisting conditions or health risks who may have trouble getting regular health coverage.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1024
501(c)(27)

State-based Mutual Insurance Organizations for Workers Compensation.

  • These organizations are organized at the state level, often enacted by state law.
  • Members: Companies required by law to provide worker’s compensation benefits are also required to be members of a 501(c)(27) organization.
  • Income is derived mostly from member dues, also from government grants.
  • All surplus income goes back to members as dividends.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990 or 990-EZ
501(c)(28)

The National Railroad Retirement Investment Trust

  • This is the only 501(c) designation for a single organization.
  • This designation and the  Railroad Retirement Board were established in the Railroad Retirement Act of 1974 to resolve discrepancies in pensions and benefits for railroad workers. 
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990
501(c)(29)

CO-OP Health Insurance Issuers

  • This designation was established under the Patient Protection and Affordable Care Act of 2010, and is described as the CO-OP Program in section 1322.
  • 501(c)(29) are organizations created at the state level to provide non-profit health insurance to meet the goals of the Affordable Care Act.
  • All standard tax and UBTI rules apply.
  • Tax filings: IRS Forms 990
501(d)

Religious and Apostolic Organizations

  • 501(d) organizations must have a common treasury or community treasury.
  • These organizations may exist for the mutual benefit of members
    • Members must report pro rata shares of profits from 501(d) organizations on their tax returns,  to be treated as dividends, even if not distributed.
  • Donations are not tax exempt
  • Tax filings: IRS Forms 1065
501(e)

Cooperative Hospital Service Organizations

  • IRS Form 1023 must be filed to qualify as 501(f).
  • 501(e) organizations provide services to 501(c)(3) hospitals and their patients. They must serve two or more such hospitals.
  • Services can include data-processing, warehousing, billing, and more, plus education of individuals on those services.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1023
501(f)

Cooperative Educational Service Organizations

  • 501(f) invest and reinvest stocks, securities, and property on behalf of members who are 
    • educational institutions or 
    • government-sponsored property holders and, themselves, investment groups established for the benefit of public college and universities.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1023
501(k)

Child Care Organizations

  • Must be dedicated to providing child care away from the home, for the purpose enabling of guardians gainful employment
  • Must be available to the general public
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1023
501(n)

Charitable Risk Pools

  • 501(n) organizations may include only members who are 501(c)(3) organizations.
  • May provide insurance for any type of risk associated with recognized activities of 501(c)(3) charitable organizations, except risks related to medical malpractice.
  • Must be governed by an elected board of directors made of individuals from member 501(c)(3) organizations.
  • Must be formed with at least $1M in startup capital from nonmember charitable organizations.
  • Exempt from all state taxes.
  • Tax filings: IRS Forms 990 or 990-EZ
  • Application for status: IRS Form 1023
521(a)

Farmers’ Cooperative Associations

  • Associations of farmers or similar agricultural professionals, for to provide (at no profit) marketing and purchasing of supplies and services that will benefit members.
  • Differs from 501(c)(5) organizations, in that 521(a) organizations are directly involved in cooperative business and marketing efforts.
  • May also be considered “501(b)(1)” because of where the definition lies in the IRC.
  • Exempt from all income taxes.
  • May deduct dividends paid on capital stock and “distributions of non-patronage income to patrons made on a patronage basis”.
  • Exempt from  the registration and prospectus requirements of the Securities Act of 1933.
  • Tax filings: IRS Form 990-C
4947(a)

Non-exempt Charitable Trusts

  • A trust maintained underneath another organization, usually a private foundation.
  • Remainder trusts are operated at the discretion of the parent organization
  • Lead trusts are distributed by a parent organization, though the donor of funds maintains control of their use.
  • No full tax exemptions, however, 4947(a)(1) organizations receive sizable tax deductions.
  • Tax filings: IRS Form 990-PF
170(c)(1)

Government Entity

  • Includes the U.S. Government, all State, District, and Territory Governments, other political subdivisions (i.e. municipalities), and their agencies.
  • Donations are tax deductible
  • None