Certain organizations may qualify for exemption from federal income tax. These organizations generally must apply for recognition of exemption and file annual informational returns. Contributions to domestic exempt organizations—other than those testing for public safety—are deductible as charitable contributions.
An organization qualifies for exemption only if it is organized and operated exclusively for one or more of the following purposes:
- Religious
- Charitable
- Scientific
- Testing for public safety
- Literary
- Educational
- Amateur sports competition
- Prevention of cruelty to children or animals
To qualify, the organization must be a corporation, community chest, fund, foundation, or trust—not an individual or partnership.
Examples of qualifying organizations include nonprofit homes, PTAs, charitable hospitals, alumni associations, schools, universities, youth clubs, and churches.
Form 1023 – Recognition of Exemption
Most organizations must file Form 1023 to be recognized as exempt.
- Filed within 27 months of formation → exemption effective from formation
- Filed after 27 months → exemption effective from filing date
Organizations Not Required to File Form 1023
- Churches and related religious organizations
- Organizations with gross receipts normally ≤ $5,000
Gross Receipts Test
An organization normally has ≤ $5,000 in gross receipts if:
- First year: ≤ $7,500
- First two years combined: ≤ $12,000
- Three‑year test: prior two years + current year ≤ $15,000
If receipts exceed these thresholds, Form 1023 must be filed within 90 days after the period in which the limit was exceeded.
Form 990 – Informational Returns
Exempt organizations must file annual informational returns unless specifically exempt.
Which Form to File
- Form 990‑PF → all private foundations
- Form 990 → larger exempt organizations
- Form 990‑EZ → if:
- Gross receipts < $200,000
- Total assets < $500,000
- Form 990‑N e‑Postcard → gross receipts normally ≤ $50,000
Returns are due the 15th day of the 5th month after year‑end. Extensions: Form 8868 provides a 6‑month extension.
Form 990‑T – Unrelated Business Taxable Income (UBTI)
Even exempt organizations may owe tax on UBTI.
UBTI is income from a trade or business that:
- Is regularly carried on
- Is not substantially related to the organization’s exempt purpose
If gross UBTI ≥ $1,000, the organization must file Form 990‑T. Estimated tax payments are required if expected tax ≥ $500.
Failure to File Form 990 – Penalties
For returns due in 2026:
- Penalty: $25 per day, up to the lesser of $13,000 or 5% of gross receipts
- For organizations with gross receipts > $1,309,500:
- Penalty: $130 per day, max $65,000
Penalties apply for late filing, incomplete filing, or incorrect information.
Employment Tax Requirements
Exempt organizations must withhold and pay:
- Federal income tax
- Social Security and Medicare (FICA)
- Federal unemployment tax (FUTA)
unless specifically exempt.
Compensation for services performed by ministers or members of religious orders is generally exempt from FICA and FUTA. Churches may elect exemption from employer FICA by filing Form 8274.
Organization Reference Chart
The tax code includes many categories of exempt organizations, each with its own application and filing requirements. Examples include:
- 501(c)(1) – federal instrumentalities
- 501(c)(3) – charitable, religious, educational
- 501(c)(4) – civic leagues
- 501(c)(5) – labor and agricultural groups
- 501(c)(6) – chambers of commerce
- 501(c)(7) – social clubs
- 501(c)(8) – fraternal societies
- 501(c)(9) – employee beneficiary associations
- 501(c)(10) – fraternal groups without member benefits
- 501(c)(13) – cemetery companies
- 501(c)(19) – veterans’ organizations
- 527 organizations – political organizations
Each category has specific rules for qualification, application, and annual reporting.