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What is a nonprofit organization? This is often dependent upon who you ask. Sometimes nonprofits are referred to as charities, community based organizations, or non-government organizations. Some people refer to nonprofits by their disciplines, such as environmental groups or human service organizations or the arts. The nonprofit sector is also called the volunteer sector, philanthropic sector, independent sector and third sector.
The best way to define a nonprofit is to think in terms of its mission. What makes a nonprofit corporation different from a business corporation is that a nonprofit’s successful “bottom line” is defined as achieving its mission—whether that’s providing shelter to a city’s homeless, presenting a dance series, or visiting homebound seniors.
While a nonprofit can actually earn excess revenue (i.e. earn more money than it spends on expenses), any such revenue must be used to promote the mission and sustain the work of the organization.
A nonprofit organization is a corporation formed under the rules of Oregon Revised Statutes Chapter 65. There are three types of nonprofit corporations in Oregon:
- public benefit—nonprofits that undertake activities to benefit their communities, including social services, health care, education, the arts, and other activities to improve the quality of life
- mutual benefit—membership organizations like homeowners associations and clubs
- religious—organizations like churches, synagogues, and temples
Even though there are three types of nonprofit corporations in Oregon, the term “nonprofit” is generally used to refer only to a public benefit corporation, formed to provide broad benefit to many people.
The Internal Revenue Code creates special provisions for nonprofit organizations that are deemed “charitable” under code section 501(c)(3). These organizations, sometimes called “501(c)(3) organizations,” serve broad public purposes, including educational, religious, scientific, and literary activities, as well as the relief of poverty and other public benefit actions.
Donors may deduct contributions to 501(c)(3) organizations as charitable deductions on their tax returns. 501(c)(3) organizations are exempt from corporate income tax.
The IRS determines whether an individual nonprofit corporation qualifies as 501(c)(3) organization based on that organization’s written application for tax exempt status.
About half of the nonprofits that have applied to the IRS for “charitable” status have received a favorable determination. The remaining half may be exempt from corporate income tax under other parts of the Internal Revenue Code, but donors may not deduct contributions to these organizations as charitable contributions.
Other types of tax-exempt organizations include: social welfare/advocacy organizations (501(c)(4)), labor and agricultural associations (501(c)(5)), business leagues (501(c)(6)), and fraternal beneficiary societies (501(c)(8)). In most cases, contributions to these organizations are not tax-deductible.