The terms ‘tax exemption’ and ‘tax deductible’ are not one and the same.
‘Tax-exempt’ implies that organization doesn’t have to pay taxes on its income.’Tax deductible’ means that a donor can claim tax deductions in his federal income tax return upto a certain proportion of the donated amount.
A tax-exempt status does not always grant a deduction benefit to the donor. The following differentiates these two terms:
I) Exemption is freedom from paying taxes on income. Deduction tends to reduce the income on which taxes would then be calculated.
II) Section 501(c) of Internal Revenue Code define round 25 categories of tax-exempt organizations. OUt of these 25 categories only donors to 4 categories of nonprofit organizations are allowed deductions.
III)To avail tax deductibility in addition to tax exemption, the organization must meet additional requirements laid in Section 170 of the Internal Revenue Code.These requirements must be met in addition to the organization qualifying for tax-exempt status so that its own income isn’t taxed.
IV) Organizations formed uder section 501 c 3 of IRS code (public charity organizations) can avail both tax exemption for itself and tax decutibility for its donors.
V) Calculating deduction: Individuals can avail deductions on their donations to 501 c 3 organiations, only if they itemize deductions on their tax returns. Individuals can deduct up to 50% of their income to public charities, and up to 30% to private foundations. Corporations may avail a deduction of up to 10% of their income,regardless of whether it donates to a public charity or a private foundation.