Tax Compliance Issues for Non-Profits
Whether you’ve just started a nonprofit, recently submitted your organization’s first Form 990, or are the executive director, it’s important not to lose sight of your obligations under federal and state tax laws. From annual filing and reporting requirements to taxes on business income and payroll compliance, here’s a quick look at what nonprofits need to know about tax compliance.
Annual Filing and Reporting Requirements: Form 990
Once you’ve applied for and received tax-exempt status under (Section 501(c)(3) and filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, your organization is officially a nonprofit, and is exempt from federal income tax under section 501(c)(3). Tax exempt status refers to exemption from federal income tax on income related to the organization’s mission, as well as the ability to receive tax-deductible contributions from donors.
The next step is to comply with annual filing and reporting requirements, specifically, Form 990, Return of Organization Exempt from Income Tax.
Generally, tax-exempt organizations are required to file annual returns. If an organization does not file a required return or files late, the IRS may assess penalties. In addition, if an organization does not file as required for three consecutive years, it automatically loses its tax-exempt status.
There are four different Forms 990; which form an organization must file generally depends on its gross receipts. Forms 990-EZ or 990 are used for organizations with gross receipts of less than $200,000 and with total assets of less than $500,000. Form 990 is used for nonprofits with gross receipts greater than or equal to $200,000 or total assets greater than or equal to $500,000.
When gross receipts are less than or equal to $50,000, certain small organizations may file an annual electronic notice, the Form 990-N (e-Postcard); however, organizations eligible to file the e-Postcard may choose to file a full return. Private foundations file Form 990-PF regardless of financial status.
Form 990 is submitted to the IRS five and a half months after the end of an organization’s calendar year. For example, for nonprofits whose calendar year ends on December 31st, the initial return due date for Form 990 is May 15. If a due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.
Extended due dates of three and six months are available for Forms 990; however, for Form 990-N the due date is the “initial return due date,” e.g. May 15 and extended due dates do not apply.
NOTE: Unlike individual tax returns filed with the IRS, which may be postmarked on April 15, Forms 990 must be received (not postmarked) by the IRS before the May 15 due date.
Unrelated Business Income Taxes (UBIT)
Unrelated business income is defined as income from a trade or business which is regularly carried on and is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.
While it may come as a surprise to some, nearly all tax-exempt organizations are required to pay taxes on unrelated business income, which might include proceeds from an annual holiday card sale or souvenirs related to an educational exhibit in support of the nonprofit’s mission.
If the IRS determines that a nonprofit is significantly under reporting income from unrelated business activities, it may lose its tax-exempt status.
Employment and Payroll Compliance
Similar to for-profit companies, nonprofit organizations must comply with both federal and state payroll reporting requirements. Federal tax withholding, social security taxes, and Medicare taxes must be deposited through the Electronic Federal Tax Payment System (“EFTPS”), and the organization must file Form 941 on a quarterly basis. Nonprofits are also required to report reimbursements to employees for out-of-pocket expenses; however, nonprofits that create an accountable reimbursement plan or ARP that meets IRS guidelines are able to avoid these reporting requirements.
State Tax Compliance
Most nonprofit organizations incorporate before applying to the IRS for tax exempt status. As such, they must comply with state laws such as annual or periodic registrations. Each state has different laws, but in general, nonprofit organizations must update basic contact information including mailing address, names of responsible parties, and registered agents. Some states require that charitable organizations apply for sales/use or property tax exemptions as well.
Further, charitable organizations that solicit donations in a particular state are subject to state solicitation laws that require the nonprofit to register with the state(s) and to report on the nonprofit’s fundraising activities. For nonprofits that solicit donations from residents in more than one state, compliance is often challenging. Organizations that fail to register are subject to hefty penalties.