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  • Writer's pictureJohn B. Reyna

What's the difference between non-profit and tax-exempt status?

Updated: Jan 24, 2023

The terms non-profit and tax-exempt are not synonymous. Yet, these terms are often mixed up or used interchangeably. Since they are different concepts, it's essential to understand the difference.

What is a non-profit organization?

Non-profit status refers to incorporation status under state law. State law dictates the form of the non-profit entity (e.g., non-profit corporations and charitable trusts). Texas law allows for the formation of non-profit corporations.

For additional information, please visit the following blog post: How to start a Texas non-profit corporation.

What is a tax-exempt organization?

Tax-exempt status refers to federal income tax exemption under the Internal Revenue Code (“IRC”).

Can a Texas non-profit organization be exempt from state taxes?

Yes. Texas non-profit corporations are eligible for certain benefits, such as exemption from Texas sales tax, hotel occupancy tax, and franchise tax. Thus, a Texas non-profit corporation can be tax-exempt for state purposes. Still, when most people refer to tax-exempt organizations, they mean federal tax exemption.

Are Texas non-profit organizations automatically exempt from federal or state taxes?

No. To become exempt, the corporation must meet specific requirements and apply with both the IRS and the Texas Comptroller. Organizations that meet the requirements for federal tax exemption can generally rely on that status to become exempt from state taxes. To apply for tax exemption under Texas law, the organization must apply for exemption by submitting Form AP-205, Texas Application for Exemption-Charitable Organizations, to the Comptroller’s office.

For additional information, please the following blog post: How to apply for 501(c)(3) tax exemption.

Are non-profit organizations required to apply for federal or state tax exemption?

Non-profit organizations are not required to become tax-exempt. Taxable non-profit organizations exist for various reasons. For example, they might choose not to apply for tax-exemption. Or they may not qualify for federal tax-exempt status.

Are all tax-exempt organizations 501(c)(3)’s?

No. In the term 501(c)(3), the letter and the number refer to a specific tax-exempt category in the IRC.

Section 501(c) of the IRC contains a list of 29 categories of tax-exempt organizations. Most non-profit corporations qualify for federal tax exemption under one of those categories. The most common type of tax-exempt organization is a 501(c)(3) organization, which people commonly refer to as a charitable organization. To qualify as a tax-exempt 501(c)(3) organization, a non-profit must exist exclusively for charitable purposes. Those purposes include educational, religious, charitable, scientific, and prevention of cruelty to animals and children.

This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-attorney relationship between the Texas Hospitality and Non-profit Law Center, PLLC and any recipient.

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