Which of the following statements about not-for-profit corporations is most correct?

• A. They can issue tax-exempt (municipal) debt
• B. They must distribute profits to owners
• C. They are taxed on all income
• D. They issue stock to raise capital

Answer: (A)

Not-for-profit organizations can access tax-exempt financing through municipal debt to fund capital projects because their activities serve a public or charitable purpose. Investors in these bonds receive interest that is exempt from federal income tax, which lowers borrowing costs for the issuer and makes long-term funding for missions like hospitals or universities more affordable.

This fits the nature of not-for-profits, which reinvest earnings back into their mission rather than distributing profits to owners, since they don’t have owners or stock to issue. They’re not taxed on income related to their exempt purposes, though unrelated business income can be subject to tax. So the ability to issue tax-exempt debt stands out as the best fit for how these organizations finance their activities.