Edited by Bruce A. Seaman and Dennis R. Young
Chapter 20: Federal Tax Policy
Michael Rushton Introduction This chapter is concerned with the state of recent economic research on the impacts of the tax policy of the US federal government on nonprofit organizations. For comprehensive surveys of the laws governing tax exemption readers are directed to Fishman and Schwarz (2003) and Simon et al. (2006). The chapter will cover three significant aspects of tax policy: the exemption for nonprofits from the corporate income tax, with the exception of those net revenues subject to the unrelated business income tax (UBIT); the deduction of charitable donations from the base of the personal income tax; and the deduction of charitable gifts from the base of the estate tax. Of these three topics, the first deals with the tax treatment of earnings of nonprofits, and the second and third deal with the effects on donations to nonprofits. What do we know? What remains to be studied? Nonprofit organizations in the USA with section 501(c)(3) status do not pay corporate income taxes on their net revenues. The tax exemption is granted when the nonprofit can establish that it is for a charitable purpose, which is defined by the Internal Revenue Code to include ‘religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals’, and also that the nonprofit abides by the...
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