When a nonprofit earns 501(c)(3) tax-exempt status from the IRS, it can feel a bit like planting a long-awaited seed and finally seeing that first sprout. It’s a major milestone, one worth celebrating! But the term “tax-exempt” is often misunderstood, and many assume it means freedom from all taxes. If only nonprofit compliance were as simple as watering a tomato plant!
Let’s dig into what tax-exempt status actually covers, and what it doesn’t.
Federal Income Tax: Yes, You’re Exempt!
If your organization has 501(c)(3) status, you do not have to pay federal income taxes on revenue related to your charitable mission. This is the core benefit of tax-exempt status and the one most people are familiar with.
We will write more about unrelated business income tax (“UBIT”) at a later date; if the income is unrelated and actual business income (e.g a bakery versus a bake sale) you will be subject to income taxes, with some exceptions. Stay tuned!
What About Payroll Taxes?
Contrary to some misconceptions, even though nonprofits are exempt from income taxes, all employers (including nonprofits) must pay payroll taxes to the IRS and the State of Oregon. There are no exemptions here. If you have employees, payroll taxes must be calculated and paid, just like any for-profit business.
To avoid any compliance issues, nonprofits should consult a payroll provider to ensure everything is handled correctly.
What About Sales Tax?
Nonprofits are not automatically exempt from sales tax. The good news for Oregon nonprofits: Oregon doesn’t have sales tax (a true gift from the garden gods). But purchases made in other states may be subject to that state’s sales tax, and rules differ everywhere.
If your nonprofit regularly buys supplies from an out-of-state vendor, check that state’s regulations. Many states offer exemptions, but they often require an application or specific documentation.
Many businesses in the U.S. offer nonprofit sales tax exemptions, look for this on websites or on check out pages when making nonprofit online purchases.
What About Property Tax?
Property tax exemptions are not automatic. You must apply to your county assessor using the correct form for either property owned by the nonprofit or leased by the nonprofit, and only property used exclusively for charitable purposes may qualify. Note that the criteria for applying for property tax exemption is much narrower than the criteria needed for federal 501(c)(3) income tax exemption.
Although there is a state law standard (found in ORS § 307.130), some rules can vary by county, and exemptions may not cover local assessments or special taxes.
For example, nonprofit organizations that own or lease property in Lane County and want to claim a property tax exemption generally must apply to the Lane County Assessor (all exemption forms found here) by April 1 for the upcoming tax year, which runs from July 1 through June 30. If the April 1 deadline is missed, Oregon law allows a late filing up to December 31 of the same tax year, but a late filing fee applies (currently $100). Special timing rules also apply if the nonprofit acquires property after March 1 but before July 1, in which case the exemption application must typically be filed within 30 days of acquisition to qualify for that tax year. If leasing property, make sure to get your landlord’s signature on the application, and contact the county assessors office with any questions.
Because exemptions are closely tied to ownership, use, and annual deadlines, nonprofits should calendar these dates carefully and review them each year, particularly if their space, programs, or property arrangements change.
What About Other Types of Taxes?
Any taxes aside from the federal income tax are not automatically waived for 501(c)(3) nonprofits.
Depending on their activities and assets, nonprofits may still be subject to several other types of state and local taxes, such as business personal property tax. (Even if a nonprofit’s real property is exempt, items such as furniture, computers, equipment, tools, and machinery used in operations may be taxable unless a specific exemption applies, and these assets generally must be reported annually to the county assessor on one of the forms listed above.)
Nonprofits may also be subject to local taxes and fees imposed by cities or counties, such as business license fees, registration fees, or local service charges, which are not automatically waived for tax-exempt organizations.
Certain nonprofits may also trigger lodging or tourism-related taxes if they operate short-term lodging, rent rooms or facilities to the public, or host retreats, camps, or events involving overnight stays. In those cases, the obligation to collect and remit transient lodging taxes often applies regardless of nonprofit status.
In addition, nonprofits can be subject to special assessments or charges tied to property or services, such as local improvement district assessments, utility or stormwater fees, or system development charges, which are typically not considered “taxes” for exemption purposes and therefore remain payable even when property taxes are exempt.
The key takeaway for Oregon nonprofits is that tax exemption is highly specific; it depends not only on the organization’s status, but also on the nature of its activities, the type of property or assets involved, and the jurisdiction imposing the charge. As a result, nonprofits should review their operations periodically and not assume that all taxes or assessments are automatically eliminated simply because the organization is tax-exempt.
In other words, tax-exempt status covers a lot, but it’s not a magic fertilizer for every financial obligation.
If We Don’t Pay Taxes, Do We Still File a Tax Return?
Yes. . . but not the kind you might expect.
Nonprofits must file an annual Form 990 with the IRS. This is not a traditional tax return, but more of a public transparency document. It shares information about your mission, finances, programs, and governance.
Depending on your organization’s revenue level, you may need to hire a CPA who specializes in the nonprofit sector, especially as your organization’s financial activity grows more complex.
For more information about which form 990 your organization needs to file and when, check out our blog post about this topic.
Law Garden specializes in supporting 501(c)(3) tax exempt organizations; buzz on over to learn more about the services we offer.
