Tax Exempt Organizations
Various tax systems grant a tax exempt organizations, persons, income, property or other items taxable under the system. Tax exempt organizations may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some systems. Tax exempt organizations status may provide a potential taxpayer complete relief from tax, tax at a reduced rate, or tax on only a portion of the items subject to tax. Examples include exemption of charitable organizations from property taxes and income taxes, exemptions provided to veterans, and exemptions under cross-border or multi-jurisdictional principles. Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances (i.e., an exclusion). Tax exemption also generally refers to removal from taxation of a particular item or class rather than a reduction of taxable items by way of deduction of other items (i.e., a deduction). Tax exempt organizations may theoretically be granted at any governmental level that imposes taxation, though in some broader systems restraints are imposed on such exemptions by lower tier governmental units.
Tax exempt organizations specific monetary exemptions
Some jurisdictions allow for a specific monetary reduction of the tax base, which may be referred to as an exemption. For example, the U.S. Federal and many state tax systems allow a deduction of a specified dollar amount for each of several categories of “personal exemptions.” Similar amounts may be called “personal allowances.” Some systems may provide thresholds at which such exemptions or allowances are phased out or removed.
Some governments grant broad tax exempt organizations exclusions from all taxation for certain types of organization. The exclusions may be restricted to entities having various characteristics. The exclusions may be inherent in definitions or restrictions outside the tax law itself.
Approaches for exemption
There are several different approaches used in granting exemption to organizations. Different approaches may be used within a jurisdiction or especially within sub-jurisdictions.
Some jurisdictions grant an overall tax exempt organizations from taxation to organizations meeting certain definitions. The United Kingdom, for example, provides an exemption from rates (property taxes), and income taxes for entities governed by the Charities Law. This overall exemption may be somewhat limited by scope for taxation by the jurisdiction. Some jurisdictions may levy only a single type of tax, exemption from only a particular tax.
Some jurisdictions provide for tax exempt organizations only from certain taxes. The United States exempts certain organizations from Federal income taxes, but not from various excise or most employment taxes.
Charitable and religious tax exempt organizations
Many tax systems provide complete exemption from tax for recognized charitable tax exempt organizations. Such organizations may include religious organizations (temples, mosques, churches, etc.), fraternal organizations (including social clubs), public charities (e.g., organizations serving homeless persons), or any of a broad variety of organizations considered to serve public purposes.
The U.S. system exempts from Federal and many state income taxes the income of organizations that have qualified for such exemption. Qualification requires that the organization be created and operated for one of a long list of tax exempt purposes, which includes more than 28 types of organizations and also requires, for most types of organizations, that the organization apply for tax exempt status with the Internal Revenue Service, or be a religious or apostolic organization. Note that the U.S. system does not distinguish between various kinds of tax exempt entities (such as educational versus charitable) for purposes of granting exemption, but does make such distinctions with respect to allowing a tax deduction for contributions.
Tax exempt organizations Educational institutions
Some jurisdictions provide separate total or partial tax exemptions for educational institutions. These exemptions may be limited to certain functions or income.