Subsidyscope

Nonprofits

Structure of Nonprofit Sector in the U.S.

Nonprofit organizations have existed for centuries. From early colonial voluntary organizations to the 1.8 million1 nonprofits that exist today, many of these groups have been vital to providing basic community services. In the United States, nonprofit organizations predate the American republic.2 When European settlers first began migrating to America, voluntary and charitable organizations, such as hospitals, orphanages and fire departments were established to fulfill unmet social needs. While nonprofits in colonial times were primarily religious organizations, the eventual separation of church and state, and changing public needs, required nonprofits to adapt and evolve as well.3 The following overview briefly summarizes key characteristics of the nonprofit sector in order to provide context for interpreting subsidy-related data.

Economic Rationale for the Sector

Economists often see nonprofits as one solution to "market failure"—the idea that there are collective goods, or public goods, which are not profitable enough for businesses to provide them at the rate the public needs or wants them.4 For example, education provides benefits to society that exceed those that can be accurately valued in a market transaction.5 As a result education is undervalued, and thus underprovided, in a market economy that relies on profits to motivate behavior. Nonprofit education organizations, entities not motivated by financial gain, can make up the market shortfall. This type of market failure provides an economic rationale for government to subsidize businesses or nonprofit organizations to encourage the greater production of undervalued goods and services.

Economic theories also engage the notion of "government failure"—the failure of government to adequately provide certain services because it does not have the resources to do so or because there is an inadequate political will for their provision.6 Partnerships between nonprofits and the government may be one way to more adequately provide such services by bringing more resources and will to bear on a specific need.

Just as there are a wide array of types and sizes of nonprofit organizations, there are also multiple ways to analyze and assess nonprofits. Subsidyscope is primarily interested in their status as recipients of government funds or benefits that may contain subsidies. We make no attempt to assess the efficacy of government spending in the sector or make any value judgments regarding the sector.

Scope of the Sector

While nonprofits have a long history and continually evolving relationship with government, today the sector is primarily defined by its tax exempt status.7 However, there is no single agreed upon definition of a “nonprofit,” a concern voiced by many doing data collection and analysis of the sector. The Government Accountability Office (GAO) defines nonprofits broadly as any organization that is tax-exempt under section 501(a) of the Internal Revenue Code, and lists those organizations under section 501(c).8 Subsidyscope uses this definition in its assessment of the nonprofit sector.9

A list of all types of organizations considered tax exempt under 501(c) is presented at the end of this document. The organizations listed under section 501(c)(3), generally known as “public charities,” include religious organizations, hospitals, universities and charities. Public charities, as well the organizations under section 501(c)(4), which include civic leagues, social welfare organizations, and certain local associations of employees, make up the majority of the formal nonprofit sector.10

Tax Requirements of the Nonprofit Sector

Different Internal Revenue Service (IRS) registration and filing documents supply various financial data depending on the type of nonprofit. Thus, to study the whole sector the data must be carefully aggregated. However, the tax filings and other sources of information do allow some description of the overall sector.

Nonprofit organizations with over $5,000 in annual gross income are required to register with the IRS.11 Religious organizations do not have to register with the IRS for the purpose of getting the tax exemption, though the Urban Institute notes that about half of them do so.12 To claim tax-exempt status, nonprofits that have annual gross receipts of $25,000 or higher must file a Form 990 with the IRS every year,13 which provides important data regarding the different categories of nonprofits and their relative size. Churches and certain religious organizations, no matter their receipts, are not required to file a Form 990 to receive tax-exempt status.

Private foundations, which also are considered 501(c)(3) organizations, must file a Form 990-PF.14 Private foundations usually are endowed by a founding individual, family or corporation, and typically fund public charities, “though they also provide scholarships, support government activities, or operate programs.”15 Finally, a nonprofit organization operating a business that makes over $1,000 in annual gross income that is not substantially related to its charitable mission is required to file an unrelated business income tax return called Form 990-T.16 In 2006, nearly $11.3 billion in gross unrelated business income was reported to the IRS on nonprofits’ returns, however, after deductions those nonprofits only paid taxes on an estimated $1.28 billion in unrelated business income.17

Source: Subsidyscope, using data from GAO, “Nonprofit Sector: Significant Federal Funds Reach the Sector through Various Mechanisms, but More Complete and Reliable Funding Data are Needed.” February 2009. p.5.

Source: Subsidyscope calculation based on data from the National Center for Charitable Statistics. Number of 501(c)(3) Public Charities by NTEE Activities Purpose – Annual Filers Only.” October 2009. The Urban Institute.

Note:

Other includes such categories as religion-related, volunteerism, community improvement and housing, among others. Source: Subsidyscope calculation based on data from the National Center for Charitable Statistics. “Number of 501(c)(3) Public Charities by NTEE Activities Purpose – Annual Filers Only.” October 2009. The Urban Institute.

Size and Composition of the Sector

Based on the latest available data, in 2006 the nonprofit sector contributed 5 percent ($666.1 billion) to the gross domestic product and more than 8 percent ($489.4 billion) of American wages.18 In that same year, over 1.4 million nonprofits registered with the IRS (based on their gross income).19 The number of registered nonprofits grew from 1.4 million to nearly 1.6 million in three years (2006 - 2009). Over half of those filed a Form 990 with the IRS, and reported nearly $2 trillion in total revenue in 2009.20

Regarding revenue, in 2008, the top 400 nonprofits, including foundations, brought in $76.2 billion.21 Of those 400 organizations, 118 were colleges and universities, 53 were international groups, 34 were hospitals and medical centers and 26 were health charities.22About 63 percent (1,128,367 of 1,789,554) of all tax-exempt organizations were 501(c)(3)s in fiscal year 2007 (see Figure 1).23 The next largest category of nonprofits, 501(c)(4)s, accounted for nearly 8 percent (134,843) of all nonprofit entities that same year. About 100 of these organizations are HMOs and managed care plans or other medical or dental managed care plans and, while small in numbers, these organizations make up the vast majority of revenue and assets in the 501(c)(4) category.24 In 2008, of those 501 (c)(4)s, there were 109,091 registered 501(c)(4)s reporting assets of $83.0 billion and revenues of $71.9 billion, according to the National Center for Charitable Statistics.25

Major Types of Nonprofits

Health care facilities (e.g., nonprofit hospitals), educational institutions and human services organizations were the three largest types of 501(c)(3) organizations as measured by revenue in 2007 (see Figure 2).26 The most prevalent types of nonprofits, as measured by number, were organizations working in the arts, culture and humanities; education; and human services (see Figure 3).27

Federal Subsidies

While tax exempt status defines the sector, nonprofit organizations also benefit from other tax deductions, credits and exclusions in the tax code. For example, all private donations to 501(c)(3) organizations are tax exempt, meaning both the donor and recipient could receive a subsidy from the government. All of these tax benefits provide a potentially large source of federal subsidies to the nonprofit sector. Further, the federal grants, contracts and risk transfers (loans and loan guarantees) that many nonprofits receive to carry out their work may also include a subsidy component. However, it is important to note that not all of these programs do contain subsidies. For a summary of these activities, see Subsidyscope’s summary of federal assistance to the nonprofit sector.

List of Tax Exempt Organizations

Internal Revenue Code (Title 26, United States Code) By Subsection28

501(c) List of exempt organizations:

  1. Boris, Elizabeth T. “Nonprofit Organizations in a Democracy.” in Nonprofits and Government: Collaboration and Conflict. 2006. The Urban Institute. Washington DC. p. 5.
  2. Young, Dennis R. “Complementary, Supplementary, or Adversarial? Nonprofit-Government Relations.” in Nonprofits and Government: Collaboration and Conflict. 2006. The Urban Institute. Washington DC. p. 50.
  3. Ibid., 50-52.
  4. Boris, Elizabeth T. “Nonprofit Organizations in a Democracy.” in Nonprofits and Government: Collaboration and Conflict. 2006. The Urban Institute. Washington DC. p. 18.
  5. Sherlock, Molly E. and Jane G. Gravelle. “An Overview of the Nonprofit and Charitable Sector.” Congressional Research Service. Washington DC. November 17, 2009. p. 36.
  6. Boris, Elizabeth T. “Nonprofit Organizations in a Democracy.” in Nonprofits and Government: Collaboration and Conflict. 2006. The Urban Institute. Washington DC. p. 18.
  7. Government Accountability Office (GAO). “Nonprofit Sector: Increasing Numbers and Key Role in Delivering Federal Services.” July 24, 2007. p. 1.
  8. Ibid.
  9. In Nonprofits and Government, the Urban Institute defines nonprofits as a subset of all tax exempt organizations based on their mainly public service nature. For this reason, some of the aggregate statistics cited by the Urban Institute may actually understate the full scope of the sector as defined by GAO.
  10. GAO. “Nonprofit Sector: Increasing Numbers and Key Role in Delivering Federal Services".” July 24, 2007. p. 1.
  11. Boris, Elizabeth T. “Nonprofit Organizations in a Democracy.” in Nonprofits and Government: Collaboration and Conflict. 2006. The Urban Institute. Washington DC. p. 3.
  12. The Nonprofit Sector in Brief: Facts and Figures from The Nonprofit Almanac 2008. The National Center for Charitable Statistics at the Urban Institute. 2008. p. 1.
  13. IRS Filing Requirements.
  14. IRS Filing Requirements.
  15. Wing, Kennard T., Thomas H. Pollack and Amy Blackwood. The Nonprofit Almanac 2008. The Urban Institute: Washington DC. 2008. p. 139.
  16. IRS Filing Requirements
  17. IRS Table: Unrelated Business Income Tax Returns, Tax Year 2006.
  18. Wing, Kennard T., Thomas H. Pollack and Amy Blackwood. The Nonprofit Almanac 2008. The Urban Institute: Washington DC. 2008. pp. 9-10. Note: this is based on the Bureau of Economic Analysis’ National Income and Product Accounts data, which defines the sector as nonprofit institutions serving households. BEA admits that these estimates are among the “softest” in their NIPA calculations.
  19. According to a search of the Form 990 database housed by the National Center on Charitable Statistics on January 21, 2010. Search selection included: All registered nonprofits; by total asset level (1995, August – 2006, November); All States.
  20. According to a search of the Form 990 database housed by the National Center on Charitable Statistics on December 1, 2009. Search selection included: All registered nonprofits; by total asset level (1995, August – 2009, October), for Oct 2009; All States.
  21. “The Philanthropy 400.” The Chronicle of Philanthropy. Volume XXII, No. 2. October 29, 2009. Washington DC.
  22. Ibid.
  23. IRS. “Data Book October 1, 2006 to September 30, 2007.” p. 54.
  24. National Center for Charitable Statistics. “501(c)(4) Social Welfare Organizations.”
  25. Ibid.
  26. National Center for Charitable Statistics. “Number of 501(c)(3) Public Charities by NTEE Activities Purpose – Annual Filers Only.” The Urban Institute.
  27. Ibid.
  28. IRS Table: “Exempt Organizations Provisions – Internal Revenue Code.”

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