There are many kinds of nonprofits—the Internal Revenue Code defines more than 25 categories of organizations that are exempt from federal income taxes. But for most people, a nonprofit refers to what the tax code classifies as a "charitable" or 501(c)(3) organization.
What separates a charitable organization from other types of tax-exempt organizations is its purpose: it must benefit the broad public interest, not just the interests of its members. It must serve one or more of the following purposes, which come from the IRS: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or the prevention of cruelty to children or animals.
Congress and state legislatures have long recognized this special service by making these organizations tax-exempt, which enables them to dedicate their funds to fulfilling their missions. To encourage the American people to make contributions, federal and state governments have allowed taxpayers to deduct charitable contributions when calculating their income taxes.
Charitable organizations receive their tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Organizations under Section 501(c)(3) generally fall into one of two categories: public charities or private foundations. The nonprofits in our Giving Center are public charities, meaning they must document that they receive at least one-third of their annual income from the public, a unit of government, or an organization formed to raise money for a specific school, hospital, governmental unit or publicly supported charity.
All the topics above, and many others, are covered in extensive detail on the IRS website.
(Information courtesy of www.independentsector.org.)