The volume of information regarding tax filing requirements for charities and nonprofits can be overwhelming. Add to that the pressure of striving to operate within guidelines to avoid losing the organization’s tax-exempt status. Given the complexity of tax law, it’s always a good idea to seek advice from a tax professional with nonprofit or private foundation experience, but to help you clarify your requirements and understand how to meet them, we’ve compiled a list of resources you can consult.
The IRS is the best starting point for useful tax resources for charities and nonprofits. Under the Internal Revenue Service (IRS) tax code, subsection 501(c), nonprofits are exempt from federal incomes taxes. However, just creating a nonprofit organization does not make it tax-exempt automatically. There is a process that must be followed.
IRS: Tax Exemption Process and Forms
The first steps in the process are to incorporate in a state and obtain an Employer Identification Number (EIN) by filing form SS-4 with the IRS. After these steps, most nonprofits will need to file form 1023 with the IRS and provide Articles of Incorporation to explain the purpose and function of the nonprofit, which the IRS will consider in its review. Nonprofits intending to operate under section 501(C)(4) for promotion of social welfare must file Form 8976.
IRS: Annual Filing and Forms
Most tax-exempt organizations are still required to file annual income tax returns in some variant of Form 990, a form that provides financial information about the organization to the public. Failing to file or filing late can still incur penalties. Failing to file three years in a row will result in the loss of an organization’s tax-exempt status, too. Nonprofits will file Form 990, Form 990-N if the organization’s gross receipts are $50,000 or less, Form 990-EZ if the organization’s gross receipts are less than $200,000 and total assets less than $500,000 (with some exceptions), or Form 990-PF if the organization is a private foundation. Those filing a Form 990 (sometimes 990-EZ and 990-PF) will also include a variety of schedules. Many churches and other religious organizations are exempt from filing.
Tax-Exempt Organization Search
Sometimes, donors may ask that a nonprofit or charity prove its nonprofit status and good standing. The IRS provides a way that the organization can demonstrate that its federal tax returns have been submitted via the Tax Exempt Organization Search. This search feature is also useful for organizations who just need to know if their tax returns have been received and accepted by the IRS. Users can utilize the search tool to find information about an organization’s eligibility for tax-deductible contributions, to find out if an organization has filed Form 990-N, or if it has had its tax-exemption revoked.
The IRS provides a Compliance Guide for 501(c)(3) Public Charities. The guide includes information about activities that could cause an organization to lose exempt status; information returns, tax returns, and notices required by the IRS; records that must be kept; changes that must be reported; information about resources; and so on. This guide is a must-read for those responsible for public charities.
State Links for Exempt Organizations
Because tax return filing requirements for each state differ, it’s essential that the nonprofit board of directors understand what must be filed on an annual basis. To help you, the IRS also maintains a site with State Links for Exempt Organizations. These links connect users with state government websites providing information for tax-exempt organizations, which prevents having to search state databases on your own. Information includes requirements for registration each state, taxation information, and more.
Information and Technology Resources
Tax Information for Nonprofits at the Free Management Library
The Free Management Library is just what it sounds like: a repository of free online articles to help with “personal, professional, business and organizational development.” The library is more than just a collection of articles, though. It’s a massive site with curated content that includes tools for developing a learning plan, connecting with other members, general resources, and so on. One page in the library is devoted to Tax Information for Nonprofits. The page includes links to information about taxes, payroll, record-keeping, getting tax-exempt status, preparing and filing 990 forms, and more.
National Council of Nonprofits
The National Council of Nonprofits provides resources and advocacy for charitable nonprofits in the United States. As such, the council also provides information about federal filing requirements for nonprofit organizations. The page includes information about the various 990 forms and a helpful list of FAQs about filing the 990-N. The page also provides background information on the 990s, filing deadlines, and a good list of additional resources.
Designed to help nonprofits in maintaining and improving their day to operations, Boardsource has tools to help identify an organization’s shortcomings and rectify them. Tools include their board self-assessment, the BoardSource Exchange, educational resources, and an on-demand certification program, along with a library of resources. Of particular interest might be the downloadable Form 990 Checklist, which can guide a nonprofit board in key areas.
TechSoup provides a Nonprofit Tech Marketplace where nonprofits can purchase software very inexpensively, including Intuit products. The product catalog includes all the software a nonprofit could need and more from Microsoft Office to Adobe to Intuit QuickBooks 2020. Hardware from Lenovo, Dell, and others can be acquired at a discount. Nonprofits can also access tech help and consultations. TechSoup even offers on-demand courses that address nonprofit technology needs. Webinars address a variety of topics important to nonprofits, as well. Nonprofits have to verify eligibility to acquire products and services. While TechSoup in and of itself isn’t necessarily a tax resource, it is a resource for acquiring QuickBooks at a significantly reduced rate, and good accounting practices make the tax return preparation process quite a lot easier.
See also: Best nonprofit accounting software
Tax Return Filing Resources
Form 990 Online
A federal e-file participant since 2004, Form 990 Online facilitates free and low-cost electronic and mail-in tax return filing for nonprofits and charities as a function of the Civic Leadership Project, which is focused on building communities and strengthening the network of nonprofit organizations that serve them. Users can file Form 990, Form 990-EZ, or Form 8868, which is the request for an extension, along with all schedules and supporting forms; currently, Form 990-PF is not supported. Form 990 Online facilitates year-over-year filing in that it saves key information in its database and automatically transfers it to the next year’s return. The Quick Menu allows the user to navigate easily from one form to the next and find state information. Plus, the Verify Return feature ensures that important elements, including the balance sheet, have been completed. Users needing to e-file state returns for Hawaii, Michigan, and New York can do so; all other states must mail their state-required forms. Costs are reasonable for even the smallest organizations since it’s free to file any return with less than $100,000 in gross revenue. The highest usage fee, which applies to nonprofits with more than $50 million in gross revenue, is $190.
File 990 addresses the needs of two types of nonprofits: those with revenues under $200,000 and those that function as umbrella organizations managing multiple chapters. Smaller nonprofits can also use File 990, which facilitates electronic filing of both the 990-N and the 990-EZ. Fees range from $49.99 (990-N) to $69.99 (990-EZ) for individual organizations, but File 990 also sends reminders to its customers when it’s time to file the next year’s return. And, unlike other providers, File 990 includes an enterprise pricing option for multi-chapter nonprofits. For umbrella organizations that file for each chapter, File 990 automatically imports information from the IRS and allows submission of the 990s all at once. And, for umbrella organizations that monitor submission, File 990 provides accurate information regarding who is up to date and who needs a nudge.
For organizations that need to file more specialized federal tax returns, such as Form 1120-POL and Form 990-PF, as well as all other federal nonprofit forms, ExpressTaxExempt provides a low-cost option. ExpressTaxExempt also facilitates importing prior year information, filing amended returns, and inviting others to view forms before they are submitted. Pricing ranges from $19.90 per return for Form 990-N up to $109.90 for a combined Form 8868 (extension) and 990-PF. Tax professionals who are filing on behalf of nonprofit organizations receive discounted pricing, too. All in all, the pricing is reasonable, even for very small nonprofits. All forms and statements are supported, and organizations can even now e-file required California forms. Plus, users can choose between using an interview form or the actual tax forms, which can help nonprofit boards with limited tax preparation experience to self-file.
Getting tax-exempt status and maintaining is often complicated and murky. A nonprofit owner has to be passionate about an organization’s purpose to take on the challenge of remaining compliant with the tax code. Taking some time to explore the resources included here can help you meet that challenge.
What activities can lead to a loss of tax exempt status?
Failure to file the required annual reporting documents for three years in a row will lead the IRS to revoke the tax-exempt status of an organization. In addition, activities such as failing to pursue the stated purpose or purposes identified in the articles of incorporation, using assets or income to benefit a private entity, engaging in substantial lobbying, campaigning for a political candidate, and/or earning too much unrelated business income.
Does being tax exempt mean no taxes are paid?
Nonprofits are exempt from federal income tax and, typically, state income taxes and local sales and property taxes (but not always). However, any money earned from unrelated business is subject to taxation, as spelled out in Publication 598, Tax on Unrelated Business Income of Exempt Organizations. Nonprofits also pay Social Security and Medicare taxes (payroll taxes).
What happens if an organization loses its tax-exempt status?
In short, the organization will have to pay federal income taxes and may be subject to back taxes, as well. The organization can file Form 1023 again to apply for tax exemption. Although the organization can request retroactive tax-exemption, the IRS usually doesn’t approve this request.
How can I continue learning about tax-exempt status?
The IRS provides Educational Resources and Guidance for Exempt Organizations on its website. Its Stay Exempt site provides “mini courses,” too.
- IRS Resources
- Information and Technology Resources
- Tax Return Filing Resources
- What activities can lead to a loss of tax exempt status?
- Does being tax exempt mean no taxes are paid?
- What happens if an organization loses its tax-exempt status?
- How can I continue learning about tax-exempt status?