Even after the holidays end, the season of giving continues year-round. In 2023, U.S. charities received nearly $500 billion from donors. Of that, more than $319 billion came from individuals, with money going to everything from religious to environmental causes.¹

If you intend to join the millions of Americans donating to charity, the causes you care about should generally guide your selection process. However, it’s also important to carefully consider the organizations championing those causes. 

Charities are typically categorized as non-profit, not-for-profit and for-profit charitable organizations. Understanding the differences between these three categories may help you hone in on the organizations you wish to support. 

Non-profits don’t make money

Non-profit organizations generally exist to support a cause or provide a humanitarian benefit to the public, with requirements including that all proceeds go toward furthering this effort. Due in part to this stipulation, non-profits may be given tax-exempt status by the Internal Revenue Service (IRS).²

That means they generally don’t have to pay U.S. federal corporate tax on income made from activities related to the charity. Non-profits are generally required to be transparent about where all the money is being spent, which is intended to make it straightforward for donors to keep tabs on the charity. An individual or business that makes a donation to a non-profit may be allowed to deduct it on their U.S. federal income tax return. 

Non-profits can include hospitals, foundations, universities, churches and charities. As of 2023, there were 1.7 million nonprofits operating in the U.S.³

To help make sure you’re donating to a legally registered non-profit, check to see if it is registered with the IRS using its IRS Tax Exempt Organization search tool.⁴ The IRS generally maintains a list of organizations eligible to receive tax-deductible charitable contributions.

Not all non-profits have an altruistic cause

Not-for-profit organizations are similar to non-profits in that they don’t earn a profit for their owners on their fundraising. Generally, all of the money they receive comes from donations and is put back into the organization. But, unlike non-profits, a not-for-profit business may not have to exist to serve the public or have a humanitarian mission. 

Examples of not-for-profits can include sports clubs, trade associations and credit unions. These organizations must apply for tax-exempt status, and a donation to a not-for-profit organization from a business or individual may not be tax deductible.⁵

For-profit charities aim to grow

For-profit charities may exist to serve a cause, but they are legally organized and registered as for-profit corporations. To measure its success, the company may have to look to both achieving its social goal and realizing a profit. Individuals generally won’t get a tax deduction for donating to a for-profit entity. 

The bottom line

There are many key differences between non-profits and for-profit charities. Most notably, these include the focus of the organizations, their tax-exempt status and whether or not their donors are able to take U.S. federal tax deductions for their donations to the organization.

But, the makeup of these organizations often differs as well. A for-profit business may be run by a sole proprietor, while a non-profit generally needs a board to function smoothly. Additionally, if a for-profit goes out of business, assets can be liquidated and paid out to shareholders. With a non-profit that is tax-exempt, all assets generally must be distributed to another non-profit that is tax-exempt or to the U.S. federal or state or local government if it shuts down.

Charitable donations can be an important part of a well-rounded financial strategy, but not all charities are created equally. Understanding the differences will enable you to more effectively support a cause you are passionate about – and potentially receive a tax deduction for your generosity. Consult with a tax professional for more information on how charitable donations may impact your financial strategy.

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