Why Are Nonprofits Exempt From the Corporate Income Tax?

Abstract

This article considers the nonprofit exemption from the corporate income tax (CIT), which has typically been justified with either subsidy or base-defining reasons. A different rationale is introduced: The corporate tax as applied to for-profit businesses is meant to capture in the tax base income ultimately owned by individuals that might otherwise escape tax, and the nonprofit exemption is a consequence of nonprofit income's not being attributable to any individual. To explain why nonprofits are exempt from the CIT, scholars should begin by asking why there is a CIT at all rather than by asking what is so special about nonprofits. The argument is then applied to the debate over the rationale for the unrelated business income tax.

Differential taxation in agricultural credit market

“…From the literature, it can be concluded that evidence exits on the impact of a corporate income tax exemption not only to the market share but also to overall social welfare. Rushton (2007) encourages researchers to explore the reasons behind the corporate income tax exemptions before examining the special features of non-profits. Specially, Rushton (2007) argues that it is vital to identify the distortions of corporate income tax on the economy before changing the favorable tax treatment to the nonprofits.…”

“…Rushton (2007) encourages researchers to explore the reasons behind the corporate income tax exemptions before examining the special features of non-profits. Specially, Rushton (2007) argues that it is vital to identify the distortions of corporate income tax on the economy before changing the favorable tax treatment to the nonprofits. Sjoquist and Stoycheva (2010) emphasize that it is not only essential to explore the role of the corporate income tax exemption but also the impact of property tax exemptions to the quantity and quality of services produced by for-profits and nonprofit organizations.…”

How tax incentives slow down positive change in social impact ecosystems and what can we do about it

“…Such categorization has helped social enterprises communicate who they are, what they do, and why they matter, thereby justifying their distinctiveness, legitimacy, and group membership (Vergne & Wry, 2014). In this case, the predominant narrative has been that some nonprofit social enterprises should be given tax exemptions because net income cannot be coherently defined for nonprofits, nonprofits are deliberately being subsidized by the government through the exemption, and/or nonprofits have a historic legacy of being excluded from the tax base (Rushton, 2007).…”

State and federal tax policy toward nonprofit organizations

“…An alternative argument for the current policy begins by defining the rationale for the CIT itself as tax on the income of shareholders (Rushton, 2007). Nonprofits have been exempt from the CIT from its inception because they have no shareholders.…”

“…Nonprofits have been exempt from the CIT from its inception because they have no shareholders. The exemption acts as a subsidy, Rushton (2007) argues, only because of a poorly designed CIT that inefficiently distorts investment decisions. From this viewpoint, UBIT is only necessary to discourage nonprofits from engaging in business activities that are profitable for the nonprofit because the for-profit sector is penalized by inefficiencies in the CIT.…”