Do nonprofits pay taxes? What to know for the 2026 filing season

So, do nonprofits pay taxes?

The short answer: it depends. Many nonprofits in the U.S. are exempt from federal income tax, but that doesn’t mean they’re completely off the hook. How the IRS treats a nonprofit depends on its activities, location, and compliance with both federal and state rules.

Running a nonprofit takes passion—but it also requires careful financial management and a clear understanding of the rules that keep your organization in good standing. This guide covers key updates for 2026, the different types of nonprofit and tax-exempt organizations, and practical steps for managing your nonprofit’s bookkeeping, finances, and compliance responsibilities. It also includes a brief overview of what nonprofits should know as they prepare to file 2025 returns.

Jump to:

• What nonprofits need to know for 2025 filings
• What’s new for nonprofits in 2026
• Nonprofit vs tax-exempt: Understanding the distinction
• How federal income tax exemption works
• Application process and how to obtain a determination letter
• When nonprofits are liable for taxes
• Filing required returns and disclosures
• Maintaining tax-exempt status and avoiding revocation
• Best practices for nonprofit tax compliance
• Simplify nonprofit taxes and stay focused on your mission

What nonprofits need to know for 2025 filings

While most of the changes under the One Big Beautiful Bill Act (OBBBA) take effect starting in 2026, nonprofits filing 2025 returns will still follow the current rules with a few key updates to note:

• No change yet to itemized deduction rules. The new 0.5% AGI floor and 35% cap for high-income donors won’t apply until 2026. That means 2025 is the last year donors can claim charitable deductions under the current, more flexible rules. Encourage major donors to review their giving strategies before year-end.
• Current filing process remains the same. Nonprofits will continue filing annual returns using the Form 990 series—Form 990, 990-EZ, 990-N, or 990-PF—depending on income and structure. Deadlines, extensions, and electronic filing requirements remain unchanged for the 2025 tax year.
• State filings are still required. Federal exemption doesn’t automatically apply at the state level. Most states require separate annual reports or charity renewals, so verify local deadlines and forms before

What’s new for nonprofits in 2026

Starting in 2026, several updates at both the federal and state levels will affect how nonprofits operate, raise funds, and maintain compliance:

• New donor-side rules under the One Big Beautiful Bill Act (OBBBA). High-income donors will face a 35% cap on charitable deductions, and itemizers will have a new 0.5% AGI floor for deductible gifts.
• Corporate charitable giving changes. Corporations must donate more than 1% of taxable income before gifts become deductible.
• Permanent charitable deduction for non-itemizers. Standard deduction filers may deduct up to $2,000 per couple ($1,000 for singles) for cash gifts to qualifying public charities. Contributions to donor-advised funds or private foundations do not qualify.
• Higher education endowment excise tax. Rates for large college and university endowments will range from 1.4% to 8%, depending on assets per student. Taxable income now includes certain student loan interest and intellectual property royalties.
• Stricter IRS oversight and enforcement. Increased scrutiny on unrelated business income tax (UBIT) and governance transparency through Form 990 reviews.
• State-level updates to property and sales tax exemptions. Several states have revised how nonprofits qualify for or maintain exemptions on real estate and retail sales.

Implications for nonprofits: These changes may influence donor timing and behavior, corporate partnerships, executive pay planning, and compliance reporting. Nonprofits should be ready to coordinate year-end campaigns, reassess executive compensation and endowment policies, and ensure all federal and state filings are up to date to remain in good standing.

Nonprofit vs tax-exempt: Understanding the distinction

People often assume that nonprofit and tax-exempt mean the same thing, but they’re actually quite different. An organization can be formed as a nonprofit under state law without automatically qualifying for a federal tax exemption. Understanding how the two designations work and where they overlap can help your organization stay compliant and avoid tax time surprises.

What “nonprofit” means under state law

A nonprofit is an entity organized under state law for charitable, religious, educational, or similar purposes. It must be prohibited from distributing profits to private owners or shareholders. But that label alone doesn’t guarantee any tax exemptions.

What “tax-exempt” means under federal (IRS) law

Tax-exempt status is granted by the IRS and means the organization is exempt from paying federal income tax. To qualify, the nonprofit must serve a public purpose, limit private benefits, and avoid excessive political or lobbying activities.

Not all nonprofits are tax-exempt

Some nonprofits, such as social clubs, trade associations, or those in transition, don't meet federal exemption criteria and remain subject to corporate income taxes.

How federal income tax exemption works

Earning tax-exempt status from the IRS is a major step for any nonprofit. It means your organization’s income related to its mission isn’t subject to federal income tax. But that status also comes with ongoing responsibilities. Understanding how IRS designations work, which category your organization fits into, and what’s required to keep your exemption in good standing is essential for compliance.

Common types of IRS Section 501(c) designations

The IRS recognizes many types of tax-exempt organizations. Each has its own purpose and rules, as well as requirements for reporting, operations, and how funds can be used. The most common types of IRS 501(c) designations include:

• 501(c)(3): Charitable, educational, and religious organizations. These groups can accept tax-deductible donations but are limited in political and lobbying activities.
• 501(c)(4): Social welfare and advocacy organizations. They can engage more actively in lobbying, but contributions to them are not tax-deductible.
• 501(c)(6): Business leagues and trade associations that promote common business interests rather than charitable missions.
• 501(c)(7): Social and recreational clubs organized for pleasure, recreation, or similar nonprofit purposes, with strict limits on income and membership benefits.

Application process and how to obtain a determination letter

Applying for tax-exempt status involves several steps. Here’s how the process typically works:

Step 1: Form your nonprofit at the state level

Before applying to the IRS, you’ll need to incorporate your organization with your state. This includes drafting and filing Articles of Incorporation that define your mission, purpose, and structure.

Step 2: Prepare your organizing documents

Gather your bylaws, mission statement, and financial details. This should include projected budgets and descriptions of your planned activities. The IRS uses this information to determine whether your work qualifies for exemption.

Step 3: Complete the appropriate IRS application form

Before you complete the application, you will need to obtain a federal EIN (employer identification number) for your organization. This ID number is required for filing annual returns with the IRS and for compliance with employment and payroll tax requirements.

• Use Form 1023 for most 501(c)(3) organizations.
• Use Form 1023-EZ if your organization meets the simplified eligibility requirements.
• Use Form 1024 for other 501(c) types, such as 501(c)(4) social welfare groups or 501(c)(6) trade associations.

Step 4: Submit your application and pay the fee

Once your paperwork is complete, file electronically through Pay.gov and pay the required user fee. Fees vary based on the organization type and application form used.

Step 5: Wait for the IRS determination letter

After review, the IRS issues a determination letter confirming your organization’s tax-exempt status. Keep this letter on file—it’s proof of exemption and often required for grant applications, banking, and state filings.

Step 6: Maintain your tax-exempt status

To maintain good standing, file annual returns, usually a Form 990, 990-EZ, or 990-N, and continue operating within your stated exempt purpose. Failure to file for three consecutive years results in automatic revocation of your tax-exempt status.

When nonprofits are liable for taxes

It may sound a bit contradictory, but tax-exempt organizations sometimes have to pay taxes. Certain types of income and activities fall outside a nonprofit’s exempt purpose and can trigger tax liability at the federal, state, or local level. Knowing when and where taxes apply helps you plan ahead, meet legal requirements, and avoid unexpected penalties.

Unrelated business taxable income (UBTI)

Income from activities unrelated to your nonprofit’s core mission is considered Unrelated Business Income (UBI). Examples include selling ads or renting property out to the public. If the activity is regular and ongoing, it’s subject to the Unrelated Business Income Tax (UBIT). Nonprofits with more than $1,000 in annual UBI must file Form 990-T and pay taxes on that income.

State and local income tax considerations

Federal exemption doesn’t automatically extend to state or local taxes. Many states require nonprofits to apply separately for an income tax exemption. Others may impose taxes on unrelated income or organizations that don’t meet their state-level requirements. It’s important to check with your state’s tax authority to confirm filing obligations.

Sales tax responsibilities (purchases and sales)

Sales tax laws for nonprofits vary widely. Some states exempt nonprofits from paying sales tax on purchases made for exempt purposes. Others require nonprofits to collect and remit sales tax when selling merchandise, tickets, or services to the public. Always verify local rules, as exemptions typically depend on both what’s sold and how the proceeds are used.

Property tax and exemptions for nonprofit-owned real estate

If your organization owns property used exclusively for charitable or educational purposes, you may qualify for a property tax exemption. However, rules differ by state and even by county. If property is leased to another party or used for unrelated business, it may be partially or fully taxable. Always maintain documentation showing how the property supports your nonprofit’s mission.

Employment and payroll taxes (FICA, FUTA, income tax withholding)

Nonprofits with employees must handle payroll taxes just like for-profit businesses. This includes adhering to the following payroll responsibilities:

• Withholding federal income tax from employee paychecks.
• Withholding and remitting Social Security and Medicare (FICA) taxes, including the employer match.
• Understanding unemployment tax rules: 501(c)(3) organizations are generally exempt from the Federal Unemployment Tax (FUTA), but many states require participation in state unemployment programs.
• Maintaining accurate payroll records and making timely deposits.

Filing required returns and disclosures

Even tax-exempt organizations must report their financial and operational activities each year. The IRS uses these filings to ensure nonprofits remain transparent, accountable, and compliant with their exempt purpose. Knowing which form to file, when it’s due, and what happens if you miss a deadline helps protect your organization’s status.

Form 990, 990-EZ, 990-N, 990-PF overview

Most nonprofits must file an annual return from the Form 990 series, which provides the IRS and the public with key information about your finances, programs, and governance. These filings are public records, so accuracy and transparency are essential. Many donors and grantmakers review Form 990s before making funding decisions.

The Form 990 version you file depends on your organization’s size and type:

• IRS Form 990-N (e-Postcard): For small nonprofits with gross receipts of $50,000 or less.
• IRS Form 990-EZ: For organizations with gross receipts under $200,000 and total assets under $500,000.
• IRS Form 990: For larger organizations exceeding those thresholds.
• IRS Form 990-PF: Used by private foundations, regardless of income to report investment income, taxes owed, and details about charitable distributions and activities.

All Form 990 filings must be submitted electronically through the IRS’s e-file system or an approved e-file provider.

Filing deadlines and extensions

Your annual return is due on the 15th day of the 5th month after your fiscal year ends. For example, if your fiscal year ends on December 31, your return is due May 15. If you need more time, you can request an automatic six-month extension using Form 8868 before your original due date.

It’s also important to meet any state filing deadlines, as many states require separate annual reports or charity registrations in addition to your federal Form 990.

What happens if you fail to file or are late

Failing to file your annual return can have serious consequences:

• Late penalties: The IRS can assess daily fines based on your organization’s size and how long the return is overdue.
• Automatic revocation: If you fail to file a Form 990, 990-EZ, or 990-N for three consecutive years, the IRS will automatically revoke your tax-exempt status.
• Reinstatement requirements: Regaining exemption means reapplying with Form 1023 or 1024 and paying new user fees, which can be costly and time-consuming.

Maintaining tax-exempt status and avoiding revocation

Once your organization earns tax-exempt status, it’s vital to protect it. Certain activities, even if well-intentioned, can jeopardize your exemption or trigger IRS penalties. Understanding common pitfalls helps ensure your nonprofit continues operating within IRS rules.

Engaging in too much unrelated business activity

Nonprofits can generate some income from unrelated business activities, but when that income becomes substantial compared to mission-related revenue, the IRS may question whether your organization still operates primarily for its exempt purpose.

Excess benefit transactions, private inurement

The IRS doesn’t allow nonprofit insiders, like board members, executives, or key employees, to personally profit from the organization’s funds or resources. This is called private inurement, and it happens when someone receives a financial benefit beyond what’s reasonable or necessary for their role.

An excess benefit transaction is a common example. This could be paying an executive more than fair market value, offering personal perks, or approving contracts that benefit board members.

Lobbying and political campaign activity

Under the Johnson Amendment, 501(c)(3) organizations are prohibited from supporting or opposing political candidates and must limit lobbying activity. Even unintentional political involvement can result in penalties or revocation of exemption.

Best practices for nonprofit tax compliance

Strong compliance starts with good habits—clear policies, accurate records, and regular oversight. Consider the following best practices to help your organization avoid penalties, maintain trust, and keep its tax-exempt status secure.

Separate unrelated business income

If your nonprofit earns money from activities not tied to its mission, track it separately from donations and program income. This makes it easier to determine when to file Form 990-T and prevents confusion during audits. Accounting software like QuickBooks can help you organize revenue by fund or program, create custom income categories, and easily separate unrelated business income from your primary mission activities for accurate reporting.

Keep proper records

Keep accurate, organized records for every donation, grant, and expense. Store supporting documents like receipts, contracts, and meeting minutes for at least three years. Clear recordkeeping is required by the IRS and is also essential for transparency with your board and donors.

QuickBooks helps simplify this process with donor and grant tracking, automatic bank feeds, and built-in reports. You can also attach digital receipts and tag restricted or unrestricted funds to stay audit-ready year-round.

Establish internal guidelines and policies

Written policies provide consistency and protect your organization’s integrity. Create guidelines for areas like conflict of interest, expense approvals, and political activity. Training your board and staff on these policies ensures everyone understands their responsibilities and helps avoid accidental violations of IRS rules. Consider using QuickBooks’ customizable user permissions to limit access to sensitive financial data and ensure internal controls are consistently applied.

Regularly review your operations and risk

Schedule annual or semi-annual checkups to review finances, fundraising activities, and compensation practices. Internal audits or finance committee reviews can catch small compliance issues before they grow. Consistent financial reporting, using online accounting tools like QuickBooks, helps identify trends and keeps leadership informed.

Work with a nonprofit-savvy tax advisor

Even the best-run organizations benefit from expert advice. Find a tax professional familiar with nonprofit law who can help interpret new regulations, review filings, and ensure you’re meeting both federal and state requirements. They can also help evaluate risk areas such as unrelated business income or executive compensation and recommend corrective actions early.

Simplify nonprofit taxes and stay focused on your mission

Promote transparency and accountability across your organization with clear policies, accurate bookkeeping, and regular financial reviews. QuickBooks helps bring it all together by simplifying accounting, reporting, and oversight—so your nonprofit can focus less on managing finances and more on driving its mission forward.