Nonprofits and public charities can receive tax-exempt status under section 501(c)(3) of the Internal Revenue Code if they meet certain requirements. For example, they must be organized for religious, charitable, scientific, literary, or educational purposes and must not directly benefit any private shareholder or individual.
This tax-exempt status prevents the organization from paying federal income taxes, but they must file an annual information return with the IRS, which includes financial information. This tax exemption applies to donations to the nonprofit and to its income. However, there are a few exceptions, such as investment income, which is subject to tax. The organization will receive an IRS Determination Letter once they have approved the nonprofit status.
In addition, some states may impose their state tax exemption or partial exemption. For example, a state may exempt a nonprofit from partial or full property taxes.