Oftentimes people confuse “tax-exempt” and “tax-deductible.” Although they are often related, they are not the same.
Instead, these refer to two different sections of the Internal Revenue Code and do two different jobs.
Understanding the difference matters, and it affects two different types of people.
The two sections, plainly
“Does this organization pay tax on its income?”
“Can the person who gave money subtract it from their taxable income?”
Tax-exemption is related to Section 501(c)(3). It is about your nonprofit. It is the provision that exempts a qualifying charitable, religious, educational, or scientific organization from federal income tax.
Tax-deduction is related to Section 170. It is about your donor. It is the provision that allows a taxpayer to deduct a contribution made to a qualifying organization.
When you apply for tax exemption, the determination letter you receive from the IRS answers whether you are tax-exempt and whether contributions to you are tax-deductible.
Why the distinction matters
Certain nonprofits — such as a 501(c)(4) social welfare organization, a 501(c)(6) business league, or a 501(c)(7) social club — are tax-exempt but not tax-deductible.
This means that while the entity will not have to pay taxes on donations it receives, donors are not able to claim that donation as a deduction on their taxes.
So telling someone that your nonprofit is tax-exempt does not answer their question about whether their donation will be tax-deductible.
What Section 170(c) actually covers
Section 170(c) sets out the categories of organizations that can receive deductible contributions. Alongside 501(c)(3) charities, the list includes:
- A state, a U.S. possession, or a political subdivision, if the gift is exclusively for public purposes
- A community chest, corporation, trust, fund, or foundation organized in the United States and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals
- A church, synagogue, or other religious organization
- A war veterans’ organization
- A nonprofit volunteer fire company
- A civil defense organization created under federal, state, or local law
- A domestic fraternal society operating under the lodge system, but only where the gift is used exclusively for charitable purposes
- A nonprofit cemetery company, where the funds are irrevocably dedicated to perpetual care of the cemetery as a whole
Two features of that list are worth noticing. It is broader than 501(c)(3) in places, and it turns on how the gift will be used as much as on what the recipient is.
What your organization is actually responsible for
When receiving tax-deductible donations and gifts, there are a few things the nonprofit must do:
Written acknowledgment at $250 and above. A donor cannot deduct a contribution of $250 or more without a written acknowledgment from your organization. It must state the amount of cash or describe the property received. If goods or services were provided, it must describe them and give a good-faith estimate of their value. If the only thing provided was an intangible religious benefit, the acknowledgment says that instead.
Quid pro quo disclosures. Where a donor gives more than $75 and receives something in return, you must give a written statement telling them that only the amount above the value of what they received is deductible, and providing a good-faith estimate of that value.
Do not value donated property. For gifts of property, describe what you received. Do not state what it was worth. Valuing the gift is the donor’s responsibility, and for larger noncash gifts a qualified appraisal may be required.
How a donor checks you
The IRS Tax Exempt Organization Search publishes deductibility status, and donors and grantmakers use it. It carries deductibility status codes that indicate which limits apply to gifts to your organization.
Two things follow from that. First, your listing is public, and sophisticated donors will look. Second, if your organization has been auto-revoked for missed filings, that is public too — and the deduction goes with the exemption.
What to say, and what not to say
“We are a 501(c)(3) organization and contributions are tax-deductible to the extent allowed by law.”
- Telling a donor how much they will save
- Telling them what their gift is worth for tax purposes
- Saying a gift is fully deductible when they received something in return
The first is a statement about your status. The second is tax advice about someone else’s return.
It is neither your job nor your risk to take.
The short version
501(c)(3) is why your organization does not pay tax. Section 170 is why your donor gets a deduction. You control the first by qualifying and staying compliant. You support the second by giving accurate receipts on time, and by not straying into advice about what a gift is worth.
Get the receipts right and the rest generally follows.
If you are working out which section fits your organization, our 501(c)(3) formation page sets out what that process involves.
This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Rules differ by state and change over time. Please speak with a licensed attorney about your own situation.