According to the National Center for Charitable Statistics nonprofits are formal organizations in the United States that qualify for tax-exempt status under the Internal Revenue Code because they are organized for the specific purposes stated in the Code.
Although there are legal distinctions among nonprofit organizations and different reporting requirements, all are exempt from paying federal income taxes. About half of nonprofits - called charitable organizations - are exempt under Section 501(c)(3).
What is 501(c)(3)?
Section of the Internal Revenue Code that designates an organization as charitable and tax-exempt. Organizations qualifying under this section include religious, educational, charitable, amateur athletic, scientific or literary groups, organizations testing for public safety or organizations involved in prevention of cruelty to children or animals. Most organizations seeking foundation or corporate contributions secure a Section 501(c)(3) classification from the Internal Revenue Service (IRS).
Note: The tax code sets forth a list of sections-501(c)(4-26)-to identify other nonprofit organizations whose function is not solely charitable (e.g., professional or veterans organizations, chambers of commerce, fraternal societies, etc.).