Since 1995, the government has determined that nonprofits' tax-exemption should not apply to commercial activities to prevent unfair competition between nonprofits and for-profit entities in Taiwan. Qualified nonprofit organizations are generally exempt from income taxation but income from goods sold and services provided. This study manually collected financial data related to foundation hospitals in Taiwan over the period from 2006 to 2008 and found that, according to the distribution of effective tax rates, the tax burden of nonprofit hospitals is generally near zero. Further, our Logit regression model analysis determined that according to discretionary accruals of the specific expenses for nonprofit hospitals, hospitals that reported net income with operating losses have tax-induced motivation to pursue earnings management. The results provide initial evidence about the effect of tax incentives on nonprofit reporting behavior.