An edited version of this article was first published in the Knoxville News Sentinel on May 20, 2012.
With nearly 1.5 million nonprofit organizations across the nation, the sector has become an important part of the U.S. economy.
Nonprofits accounted for 9 percent of all wages and salaries in 2009, according to the Urban Institute’s National Center for Charitable Statistics. They contributed 5.4 percent of the country’s gross domestic product that year, and they held an eye-popping total of $4.3 trillion in assets, up from $2.4 trillion in 1999 — a 39 percent increase after adjusting for inflation.
They also have become a burgeoning source for jobs.
Undeterred by the recession, nonprofit employment increased at an average rate of 1.9 percent from 2007 to 2009, according to a recent study by the Center for Civil Society Studies at Johns Hopkins University.
Overall, the nonprofit sector employed around 10.7 million workers in 2010, making it the third-largest U.S. workforce after retail trade and manufacturing. Internal Revenue Service annual reports show the number of tax-exempt organizations increased by almost 42 percent from 1991 to 2011.
The rise in the number of nonprofits might be due to the relative ease with which they can be created, according to Tom Pollak, director of the National Center for Charitable Statistics.
“One possible interpretation is, if you look at the numbers, it is easy to start a nonprofit, but hard to kill them,” Pollak said. “I can keep my nonprofit going indefinitely even though I have no income.”
Although the IRS has more than 30 categories of tax-exempt organizations, public charities — or organizations that fall under the Internal Revenue Code section 501(c)(3) — make up the largest group.
According to the IRS’ distinctions, public charities are tax-exempt organizations that receive contributions mainly from the general public and government grants. Religious organizations, hospitals, museums, educational institutions and research facilities are some common examples.
Private foundations also fall under the 501(c)(3) category, but are different from public charities. Foundations usually rely on an endowment or a gift from a family or a corporation, and mostly provide grants to other organizations instead of providing charitable services directly.
A study by the Scripps Howard News Service found that 40 percent of all charities and other nonprofit groups that raised at least $1 million in contributions also reported zero fundraising expenses. These zero-reporting charities collectively raised $116.7 billion, according to the charities’ most recent filing with the IRS.
The Scripps study, based on data provided by charity watchdog group GuideStar, did not include private foundations in its analysis.
The increase in the number of public charities and foundations in the past decade — a jump of 25 percent from 2001 to 2011 — would have been greater had it not been for a 2006 law passed by Congress.
A clause in the Pension Protection Act of 2006 required the IRS to cancel the tax-exempt status of all charities that had not filed returns for three consecutive years.
As a result, last year, the IRS revoked the tax-exempt status of approximately 275,000 organizations, which had failed to satisfy the filing requirement, causing a 16 percent reduction in the number of public charities and foundations from 2010.