Whether high schools are tax exempt depends on how the school is organized. Public high schools are automatically exempt from federal income tax as arms of state or local government. Private non-profit high schools can be exempt, but only if they apply to the IRS under Section 501(c)(3) and keep meeting the rules. For-profit high schools are not exempt at all; they pay tax like any other business.
Public High Schools Are Automatically Exempt
A public high school does not pay federal income tax because it operates as part of a state or local government. Under IRC Section 115, income from an essential governmental function that accrues to a state or political subdivision is excluded from gross income entirely.1Office of the Law Revision Counsel. 26 U.S. Code 115 – Income of States, Municipalities, Etc. Education is treated as a primary responsibility of state government, and public school districts are instrumentalities of the state.2Internal Revenue Service. Government Entities and Their Federal Tax Obligations
There is nothing to apply for. The IRS does not issue tax-exempt determination letters to government entities. If a vendor or grant-maker wants proof, the school can request a free governmental information letter from the IRS confirming that the entity is not subject to federal income tax.3Internal Revenue Service. Governmental Information Letter
Property tax and sales tax are separate questions governed by state law. Public schools generally do not pay property taxes on real estate used for education, because state constitutions and statutes usually exempt government-owned property from local taxation. Sales tax is more variable. A public school may still have to collect sales tax on items it sells, such as yearbooks or event merchandise, depending on state rules.
Private Non-Profit High Schools Have to Apply
A private high school gets no automatic exemption. To avoid federal income tax, it has to organize as a non-profit and ask the IRS to recognize it as tax exempt under Section 501(c)(3), which covers organizations operated exclusively for educational purposes among other qualifying categories.4Office of the Law Revision Counsel. 26 USC 501 Once approved, the school is exempt from federal income tax and donors can deduct their contributions.
The application is Form 1023, filed electronically with a user fee.5Internal Revenue Service. About Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code The streamlined Form 1023-EZ is not an option for schools. The IRS eligibility worksheet directs any organization that presents formal instruction as its primary function, has a regular curriculum and faculty, and maintains an enrolled student body to file the full Form 1023 instead.6Internal Revenue Service. Instructions for Form 1023-EZ (Rev. January 2025)
Timing matters. If the school files Form 1023 within 27 months after the end of the month it was legally formed, and the IRS approves the application, the exemption is effective back to the date of formation. Miss that window and the effective date is the submission date instead. Federal recognition is often the prerequisite for state-level exemptions from income tax, property tax, and sales tax, but most states require their own separate application.
What a Private School Must Keep Doing to Stay Exempt
A determination letter is not a finish line. A private high school has to satisfy several ongoing requirements, and any one of them can cost the school its exemption.
The Organizational and Operational Tests
The organizational test looks at the founding documents. Articles of incorporation or the trust instrument must restrict the school’s purposes to those that qualify under Section 501(c)(3), and cannot authorize more than an insubstantial amount of activity outside that exempt purpose.7Internal Revenue Service. Organizational Test Internal Revenue Code Section 501(c)(3) The documents also need a dissolution clause directing assets to another exempt organization or a government entity if the school ever closes. Without that clause, the IRS denies the application.
The operational test looks at what the school actually does. Time and resources must go primarily to the educational mission; more than an insubstantial part devoted to non-exempt purposes fails the test.8Internal Revenue Service. Operational Test Internal Revenue Code Section 501(c)(3) The rules also prohibit private inurement: no part of net earnings can benefit an insider such as a founder, board member, or their family.9Internal Revenue Service. Inurement/Private Benefit: Charitable Organizations Paying a school administrator a reasonable salary is fine. Funneling surplus revenue into a board member’s personal accounts is the kind of arrangement that ends an exemption.
A Racial Nondiscrimination Policy
Private schools face a requirement that other 501(c)(3) organizations do not. Every private school seeking or holding tax-exempt status must maintain a racially nondiscriminatory policy toward students. Revenue Ruling 71-447 established that a school practicing racial discrimination does not qualify as charitable under Sections 170 and 501(c)(3).10Internal Revenue Service. Rev. Rul. 71-447
Adopting a policy on paper is not enough. Under Revenue Procedure 75-50, a private school must:11Internal Revenue Service. Private School Update
- Put a nondiscriminatory policy statement in its charter, bylaws, or a governing body resolution, covering admissions, programs, scholarships, and all school-administered activities.
- Publicize the policy to the community it serves through an annual published notice, inclusion in all admissions brochures and catalogs, or a prominent display on the school’s primary website homepage year-round.12Internal Revenue Service. Publication 557 (Rev. January 2025)
- Keep records for at least three years showing the racial composition of the student body, faculty, and staff, plus documentation that financial aid is awarded without regard to race.
- Certify compliance every year. Schools that file Form 990 or 990-EZ do this on Schedule E. Schools not required to file a Form 990 submit Form 5578 annually instead.13Internal Revenue Service. Form 5578 (Rev. November 2019)
Missing the annual certification or failing to publish the policy can put the entire exemption at risk, even for a school that has never actually discriminated.
Political Campaigns and Lobbying
Section 501(c)(3) puts two limits on political activity. The first is absolute: a tax-exempt school cannot participate in or intervene in any political campaign for or against a candidate for public office.14Internal Revenue Service. Frequently Asked Questions About the Ban on Political Campaign Intervention by 501(c)(3) Organizations: Overview No safe harbor, no spending threshold. A letter on school letterhead endorsing a candidate, or a school social media post opposing one, can trigger revocation.
The second is a limit, not a ban. A 501(c)(3) school can do some lobbying, but no substantial part of its activities can consist of attempting to influence legislation. The IRS weighs both time and money spent on it.15Internal Revenue Service. Measuring Lobbying: Substantial Part Test A school that goes over the line can lose its exemption and owe an excise tax equal to five percent of the lobbying expenditures for the year exemption is lost. Managers who knowingly approved the expenditures may owe the same five-percent tax personally.
Annual Filings, and the Three-Year Rule
Most tax-exempt private schools have to file a Form 990 (or the smaller 990-EZ or 990-N e-Postcard, depending on size) every year, reporting revenue, expenses, officer compensation, and program activity. Schools filing a 990 or 990-EZ also complete Schedule E to certify their nondiscrimination compliance. These returns are public records; the school must make its annual return and its original exemption application available for public inspection on request or by posting them online, for three years from the filing due date. Donor names and addresses do not have to be disclosed.16Internal Revenue Service. Public Disclosure and Availability of Exempt Organization Returns and Applications: Public Disclosure Overview
The rule with the sharpest teeth is the three-year filing requirement. If a tax-exempt school fails to file its required Form 990 for three consecutive years, the IRS automatically revokes its exempt status. There is no warning, no discretion, and no appeal of a proper automatic revocation.17Internal Revenue Service. Automatic Revocation of Exemption The school then owes federal income tax, loses its ability to receive deductible contributions, and has to reapply from scratch.18Internal Revenue Service. Automatic Revocation – How to Have Your Tax-Exempt Status Reinstated
Income That Is Taxable Even for an Exempt School
Being tax exempt does not mean every dollar is untaxed. Income from an activity that is regularly carried on and not substantially related to the school’s educational mission is subject to Unrelated Business Income Tax. A school with $1,000 or more in gross unrelated business income files Form 990-T and pays the tax at corporate rates.19Internal Revenue Service. Unrelated Business Income Tax Renting the parking lot to a commercial business on weekends or selling ads in the school newspaper generally counts. A student cafeteria, the school bookstore, and student-led fundraisers generally do not. Passive income such as dividends, interest, and some rental income is also excluded.20Internal Revenue Service. Unrelated Business Income Tax Exceptions and Exclusions
For-Profit High Schools Are Not Exempt
Some high schools operate as commercial businesses owned by individuals or corporations with the goal of generating profit. These schools do not qualify for tax-exempt status under any provision of the Internal Revenue Code. They are taxed like any other business.
A for-profit high school pays federal income tax on its net earnings at the standard corporate rate of 21 percent, or at individual rates if structured as a pass-through entity. It also owes state and local income taxes, property taxes on real estate it owns, FUTA taxes on employee wages, and must collect and remit sales taxes where applicable. Donations to a for-profit school are not tax-deductible, which makes charitable fundraising much harder. The for-profit structure is rare in K-12 education for exactly these reasons.
Payroll Taxes Both Public and Private Schools Still Owe
Tax-exempt status does not remove all payroll obligations. Organizations recognized under Section 501(c)(3), including private schools, are exempt from the Federal Unemployment Tax Act, so wages paid by a 501(c)(3) educational organization are not subject to FUTA tax.21Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption These schools still withhold and pay Social Security and Medicare taxes (FICA) on employee wages and withhold federal income tax from paychecks like any other employer. For-profit schools owe FUTA on top of everything else.