Tax-exempt organizations are usually nonprofit entities that in general are exempt from paying federal taxes on their income, though they are subject to other forms of taxation, such as employment taxes. There are various rationales for granting exempt status to qualifying organizations, including that an organization relieves the burdens of government, contributes importantly to various segments of society, or accomplishes something significant for society as a whole.
There are various categories of exempt organizations, from small soup kitchens to large universities, healthcare systems, and private foundations. Organizations that satisfy the requirements of section 501(c)(3) of the Internal Revenue Code are exempt as charitable organizations that can receive tax deductible contributions under section 170. Charitable organizations are either public charities, which depend on donations from the public, corporations, and other sources to pursue their charitable missions, or private foundations, which ordinarily have one large funding source and make grants to other charitable entities and individuals instead of conducting charitable activities themselves. Also, supporting organizations under section 509(a)(3) are charities that fulfill their exempt functions through support of other exempt organizations, usually charities.
Other exempt organization categories include social welfare organizations described in section 501(c)(4), section 501(c)(5) labor organizations, section 501(c)(6) trade groups, social clubs under section 501(c)(7), fraternal entities under sections 501(c)(8) and 501(c)(10), and section 527 political organizations.
Exempt organizations can be taxed on income they generate that is not related to their exempt purpose. Also, organizations that confer private benefit on groups of individuals, whose assets inure to organization insiders, or whose operations end up being primarily commercial in nature or that otherwise operate for substantially non-exempt purposes could have their exemptions revoked by the IRS.
