When presenting at retirement communities and other venues across the country, we get asked a lot of great questions by our attendees. Recently, someone asked a question that others might have wondered about too: What is the difference between a nonprofit and a not-for-profit organization? It’s a great question because while it may sound like semantics, there are technical distinctions between these two terms that many people may not realize. 

What is a nonprofit organization?

A nonprofit is a specific type of organization that has been created for a charitable purpose or one that is intended to benefit the general public. Rather than enriching the organization’s owners or leadership, its assets and profits are reinvested into the organization in order to further the entity’s stated mission.

Nonprofit organizations can be formed by an individual, a group, or a corporation. The IRS categorizes exempt nonprofit organizations into the following categories:

  • Charitable organizations
  • Churches & religious organizations
  • Private foundations
  • Political organizations
  • Other nonprofits (e.g., social welfare, public safety, education, museums, etc.)

Depending on how these entities are set up and their intended purpose, they likely have some tax exemptions, but may have to pay taxes on certain portions of their income. This is the case with many political organizations, for instance. Others, which qualify under section 501(c)(3) of the IRS tax code, may be tax-exempt.

501(c)(3) nonprofit organizations

To qualify as a tax-exempt nonprofit organization, the IRS states that the entity must “be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.” Furthermore, it “may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.” 

Organizations that fall into the 501(c)(3) nonprofit category might be created as an association, a foundation, or a charitable trust. Importantly, however, in order to qualify as a nonprofit and receive the related sales and property tax exemptions, an organization must meet certain requirements set forth by the IRS. For example, they must:

  • Have a specific organizational purpose
  • Operate in a non-partisan manner
  • Limit the compensation of its officers and directors
    • To elaborate a bit on this point, to maintain tax-exempt nonprofit status, an organization is required to follow federal and state minimum wage laws for lower-paid employees. For higher-paid leadership/management positions, compensation (including salaries and other benefits) must be “reasonable” and not “excessive,” based on fair market value, per the IRS code. While this is a bit vague, in essence, pay should be comparable to others working in a similar role and geography at an organization with a similar budget and mission.
  • Reinvest profits in the organization’s specific cause

Additionally, donations made to nonprofit organizations that have 501(c)(3) status can be deducted from the donor’s tax return.

>> Related: Are CCRC Tax Deductions Only Available at Non-Profit CCRCs?

What is a not-for-profit organization?

While the name is similar, a not-for-profit organization is distinct from a nonprofit. Both ARE created to serve either a public or charitable objective. A not-for-profit organization, however, is organized in a way that the owners/members are permitted to benefit from the entity. This could be promoting a specific cause or providing a specific service to the local community … or it can simply serve the goals of its members.

Not-for-profits can be set up by an individual or by a group, and from a legal perspective, they may take the form of a community organization, cooperative, or recreation or social club, for example. Think of a local children’s soccer club: While the purpose of that not-for-profit is not to make money, it exists for its members’ enjoyment. 

Often, not-for-profit organizations are smaller, more local groups. They may have a small number of paid employees, but in many cases, the majority of the work is delegated to volunteers.

It is possible that a not-for-profit organization can become tax-exempt if they do the necessary paperwork and are structured in a way that allows them to qualify as a 501(c)(3) entity. Otherwise, money donated by an individual to a not-for-profit cannot be deducted from that person’s tax return.

>> Related: Kindness Matters: How Volunteering Can Benefit Seniors’ Health

Key differences between nonprofit and not-for-profit organizations

Financestrategists.com lays out a helpful list of key distinctions between nonprofit and not-for-profit organizations:

  • Donations: Donations made to 501(c)(3) nonprofits are tax-exempt. But donations made to not-for-profit organizations are free from taxes only if the organization is classified as a 501(c)(3), which, in many cases, they are not.
  • Objective: Nonprofits are formed specifically to serve the public good, and their activities (and proceeds) must be directed toward that cause. Not-for-profits, however, can have a wide variety of objectives, including recreational or social activities that benefit their members.
  • Labor and leadership: Nonprofits may have volunteers on their staff but they also have a more formal organizational setup in which professional workers are employed to oversee activities. Those employee salaries are paid by earning revenues through various activities, including fundraising. Not-for-profits, on the other hand, can be run entirely by volunteers in many cases.

Profits and retirement communities

As you can see, the differences between a nonprofit and a not-for-profit organization can be rather minor or quite significant, depending on how they are set up. The bottom line is that while both are formed to serve a public or charitable purpose, they do have distinct structures legally speaking as well as from a tax perspective. 

For those making senior living decisions, it can be important to understand the nuances between the two terms.

For one, there are retirement communities, including many continuing care retirement communities (CCRCs or life plan communities) that are set up as 501(c)(3) nonprofits. This designation means that the community is not driven by making money for their owners. Rather, they are more mission-driven — established for the benefit of society (and more specifically, older adults). Their profits are reinvested in their programs, services, and campus. (It is important to mention, however, that if the community holds debt used for construction or expansion then revenue would also go towards debt payments.)

Keeping their goal to serve the housing and care needs of older adults, many nonprofit retirement communities maintain a resident benevolent fund or “financial assistance fund.” Such programs allow residents to remain in the community even if their assets are depleted through no fault of their own (such as from an unexpectedly long stay in the skilled nursing facility).

However, it is important to understand two key points. First, some for-profit senior living organizations also maintain a separate benevolent fund to help residents who may run out of money. Often it is a charitable fund organized outside of the operating entity to which residents may contribute. But second, even at nonprofit retirement communities, simply having a benevolent fund does not guarantee assistance. The fund must be adequately funded, and financial assistance is offered at the discretion of the provider and only if it will not impair the financial position of the entity .

>> Related: For-Profit or Not-For-Profit: A Balanced Perspective

A special note on nonprofit CCRCs

You may have heard that a portion of your entry fee or monthly service fee at a CCRC is tax-deductible in certain cases. There is often confusion that such a tax deduction is only available at nonprofit CCRCs, but this is not the case.

It is important to understand that this potential tax deduction has nothing to do with the tax status of the retirement community. The deduction falls under the Medical Expense Tax Deduction and is based on the premise that certain CCRC fees are essentially pre-payment of future medical expenses.

Thus, if you qualify for such a deduction, it is based purely on your medical expenses, adjusted gross income (AGI), and how healthcare expenses are handled at your specific CCRC, per the type of residency contract you have. The tax status of the CCRC has no bearing on this particular deduction.

>> Related: Are CCRC Tax Deductions Only Available at Nonprofit CCRCs?


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