Tax-exempt is a legal status meaning that a person, organization, item of income or transaction is not subject to a particular tax. The term is used most often in two ways: for organizations, such as charities, that do not pay federal income tax on income related to their purpose, and for specific types of income that are excluded from taxable income, which are covered in detail under tax-exempt income. An exemption usually applies only to a named tax, so an organization exempt from income tax may still owe payroll taxes or sales tax.
Tax-exempt organizations and items
In the United States, the Internal Revenue Service grants exemption from federal income tax to qualifying organizations under Section 501(c) of the Internal Revenue Code. The best known are 501(c)(3) charitable, religious and educational bodies, to which donations are generally tax-deductible for donors. Other categories include social welfare groups, trade associations and labor unions. A tax-exempt nonprofit organization must still file annual information returns, usually Form 990, and pays tax on unrelated business income. Items can also be tax-exempt, such as interest on most municipal bonds for federal tax, and certain sales, such as purchases by exempt organizations or goods bought for resale, may be exempt from state sales tax with the right certificate. Tax-exempt differs from tax-deferred, where tax is postponed rather than removed.