- The Internal Revenue Service (IRS) grants tax-exempt status often to nonprofit organizations or quasi-public entities. This exemption waives the necessity of paying certain state or federal taxes.
- Tax-exempt status is normally granted to individuals or organizations to which governments want to promote economic activity or social benefits. This action thus reduces the tax burden ordinarily required. In most cases, this function is used to assist charitable organizations or religious groups. Tax exemptions are also used to help generate more income for certain parties dependent on others or government agencies for support.
- Several types of income or benefits are exempt from income taxes in some capacity due to the method of receipt. Such income would include educational scholarships, inheritances, combat pay for military persons, disability payments, personal injury payments and government bonds. The exemption of this income is set for greater allowance of independence and use of resources for affected individuals.
Another significant impact is the use of tax exemption status to promote specific business activity within a geographic area. This can include exemptions from both property and local taxes. Fully-exempt trusts that place all resources into social causes operate such organizations as Goodwill Industries, Salvation Army, Society for the Prevention of Cruelty to Animals (SPCA) and Young Men's Christian Association (YMCA).
Another segment of society exempt from paying property or other taxes is education and most healthcare. All secondary schools and many colleges or universities are also tax-exempt, as well as many local and regional healthcare facilities. This allows them to transfer resources normally used for tax payments into public services. - Tax-exempt status has been a part of United States history since colonial times. This status was granted mainly to churches and other religious organizations. In 1924, the U.S. Supreme Court ruled that the exemption had gained legal status. In 1938, the House Ways and Means Committee added governmental approval to the action. In 1959, the IRS added a special section called Section 501(c)(3), enabling applicable organizations to obtain exemption through the tax code.
- Since tax-exempt status first became legal, the tax code has become more specific in what type of exemption is granted to which specific use or organization. Organizations often qualifying for tax-exempt status are: corporations organized under an act of Congress such as federal credit unions, nonprofit organizations, employee-sponsored pension plans, religious organizations, civic organizations, community education, museums, chambers of commerce, fraternal organizations, cemetery associations, farmers cooperative and child care organizations.