Do Nonprofits Pay Taxes? What Every Organization Needs to Know Today
If you're involved with or thinking of starting a nonprofit, a big question probably on your mind is: Do nonprofits pay taxes? It's a reasonable question, especially with complex tax laws that can be overwhelming. Here's what every nonprofit organization in Denver needs to understand about taxes, exemptions, and its responsibilities.
Do Nonprofits Pay Taxes? Understanding Tax-Exempt Status
Nonprofits don’t usually pay federal income tax, but that doesn’t mean they’re completely free from tax responsibilities.
Most nonprofits, including 501(c)(3) organizations, are organized and operated exclusively for charitable, religious, educational, or similar exempt purposes. Organizations that meet the requirements for federal tax exemption under the Internal Revenue Code must apply for recognition of exemption by filing Form 1023.
Once approved, the IRS will recognize their tax-exempt status, meaning they’re exempt from paying federal income tax on income generated for those exempt purposes.
Still, securing tax-exempt status doesn’t mean a nonprofit is exempt from everything.
Where Nonprofits Might Still Pay Taxes
Even with a federal exemption, nonprofits may still face other tax obligations. Here's a breakdown:
1. Unrelated Business Taxable Income (UBTI)
If a nonprofit earns income from activities not related to its exempt purpose, that income is considered unrelated business taxable income. For example:
Operating a café that’s not part of its charitable mission
Renting out property for commercial purposes
This taxable income is subject to Unrelated Business Income Tax (UBIT) and must be reported on Form 990-T. Nonprofits must pay taxes on this income, even if they hold tax-exempt status.
2. Employment Taxes
Just like any other employer, a nonprofit organization must:
Withhold and pay Social Security and Medicare (FICA) taxes
Pay unemployment taxes
File appropriate payroll tax returns
These responsibilities apply regardless of nonprofit status. Employment, payroll, and paycheck obligations are part of running a compliant organization.
3. Sales and Use Taxes
While nonprofits often qualify for a sales tax exemption, it varies depending on state law. In Denver:
Some purchases by nonprofits may be exempt from sales tax
However, states require nonprofits to pay sales tax in certain cases
Some nonprofits are required to charge sales tax if they sell goods
So even tax-exempt organizations must stay informed about state sales and use tax compliance.
4. Property Taxes
In Colorado, a property tax exemption is available for certain types of nonprofit properties used exclusively for charitable purposes. However, if the property is used for business activities or rented out in ways that stray from the mission, part of it may become taxable.
What the IRS Requires from Tax-Exempt Organizations
After an organization is recognized as a 501(c) tax-exempt organization, the IRS still requires:
Annual Form 990 tax returns
Disclosure of revenue, expenses, executive compensation, and fundraising activity
Compliance with the Johnson Amendment prohibits political campaign involvement
You can review the full list of reporting responsibilities in the IRS guidelines for charities and nonprofits.
Common Misunderstandings About Nonprofit Taxes
Let’s clear up a few myths:
Myth 1: All nonprofit corporations are automatically tax-exempt.
Truth: The organization must be organized and operated exclusively for exempt purposes and must apply for exemption from federal income tax.Myth 2: A nonprofit doesn’t have to file anything with the IRS.
Truth: Most nonprofits must file Form 990 annually, with few exceptions.Myth 3: If it’s a charitable organization, nothing is taxable.
Truth: Income taxation can apply to unrelated business income, and state and local taxes still apply.
What Nonprofits Need to Stay Compliant in Denver
Nonprofits in Denver must stay plugged into both federal and state tax rules and any local tax code changes.
To ensure your tax-exempt status is protected:
Understand the tax status of all your income
Review business activities that may produce taxable income
File timely tax returns
Stay aware of state income and nonprofit sales tax impacts
Working with a qualified expert can prevent costly mistakes. If you're unsure about your nonprofit tax obligations, our nonprofit accountant in Denver can help guide you through every step, from exemption applications to ongoing compliance.
Conclusion: Nonprofits Must Still Pay Attention to Taxes
So do nonprofits pay taxes? Sometimes, yes.
Even with exemption from federal income tax, nonprofits must pay taxes on unrelated income, employment taxes, and potentially other state or local taxes. The key is knowing what’s exempt, what’s taxable, and how to meet all the filing requirements.
Whether you're running a small charitable organization or a large nonprofit corporation in Denver, staying compliant with IRS tax rules, state law, and reporting obligations is vital.
Explore more of our insights on nonprofit tax strategies, or reach out if you're ready to take your organization's financial stewardship to the next level.
