File Taxes for Non Profit: How Tax Filing Works in the Nonprofit Sector

Tax season is a time of the year that everyone is familiar with. The holidays are coming to a close, the new year has been rang in, and it's time to think about filing taxes. During this period, everyone from individuals to small businesses, corporations, and nonprofits are expected to file a return. Filing taxes, especially as a nonprofit organization, can be tricky. In this article, we'll aim to clear up the process.

By definition, nonprofits are established to provide a benefit to the public. Unlike for-profit businesses, nonprofit organizations don't have the goal of generating money for owners and shareholders. This allows them special treatment under the law. Many nonprofits can apply for tax-exempt status, which makes their tax filing process unique.

Tax-exempt status, outlined by the Internal Revenue Service (IRS) in section 501(c)(3) of the Internal Revenue Code (IRC), is applicable to public charities. 501(c)(3) organizations must be created for "religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals" purposes.

Tax-exempt nonprofits must work hard to maintain their 501(c)(3) status. Part of this maintenance is the correct filing of tax returns on a yearly basis. In the remainder of this article we'll tackle the various aspects of nonprofit tax returns. Starting with the tax obligations of nonprofits, we'll move onto the steps required to file taxes as a nonprofit, how to avoid common tax filing mistakes, and how to maintain tax-exempt status. By the end of this article, you'll be equipped with the knowledge required to comfortably maintain your organization's tax-exempt status.

Overview of the Tax Requirements of a Nonprofit Organization

Section 501(c)(3) of the IRC has strict requirements for the purpose of an organization that's applicable for tax-exempt status. 501(c)(3) organizations must be created for "religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals" purposes. Continued operation relating to one of these purposes is critical to the maintenance of 501(c)(3) status. Let's take a look at a large charity and break down its purpose.

• Rainforest Alliance

Rainforest Alliance is an international nonprofit organization established to "protect forests, improve the livelihoods of farmers and forest communities, promote their human rights, and help them mitigate and adapt to the climate crisis." This charity has multiple purposes that enable it to adopt tax-exempt status. Through research and innovation relating to the climate crisis, Rainforest Alliance has a basis in science, and by helping to protect forests Rainforest Alliance, by extension, prevents cruelty to animals.

Requirements of Tax-Exempt Nonprofits

Once an organization has been granted tax-exempt status, it must adhere to the following requirements:

• Earnings must not be distributed to an individual or shareholders.
• Attempts must not be made to influence legislature.
• Participation in campaign activity for or against political candidates is forbidden.

Tax-exempt organizations found to be in breach of the above requirements risk serious consequences. The IRS has the ability to impose an excise tax on nonprofits in breach of these requirements, and even revoke their 501(c)(3) status.

Form 1023: Applying for Tax-Exempt Status as a Nonprofit

Before an organization has to worry about its tax requirements as a nonprofit, it must first establish its tax-exempt status. It's typically recommended that a charity incorporates before applying. This is completed at state level and the process can vary between states.

During the incorporation process, it's crucial to ensure that any associated documents are prepared with the goal of acquiring tax-exempt status. The formation paperwork must state the exempt purpose of the organization. Exempt purposes have been outlined in the introduction and first paragraph of this section of the article.

Following the finalization of the organization's formation paperwork, tax-exempt status can be applied for through the completion of IRS Form 1023, Application for Recognition of Exemption. It's recommended that Form 1023 is filed within 27 months of the nonprofit's incorporation. Submissions within this time frame allow for a retroactive application of tax-exempt status back to the date of incorporation.

Oftentimes, IRS recognition is all a nonprofit requires to become tax-exempt at state and local level. However, it's recommended that organizations confirm their 501(c)(3) status with local authorities instead of making assumptions.

Steps to Filing a Tax Return for a Nonprofit

In order to maintain tax-exempt status, nonprofits under section 501(c)(3) of the IRC must file an annual tax return. Nonprofit organizations have to file their annual tax return at the same time as all other organizations, by the 15th day of the 5th month following the conclusion of their fiscal year. For the majority of nonprofits, that use the calendar year as their fiscal year, the deadline is the 15th of May. Like individuals, organizations that anticipate missing the deadline have the ability to file for a deadline extension with the IRS.

In some cases, nonprofits can be exempt from having to file an annual tax return. This is most common for religious organizations such as churches and religion-based schools. Other examples of organizations that may have this exemption are charitable organizations operated by the government or state, and nonprofits enveloped by a parent organization. For the latter, the parent and subordinate organizations must share all financial information, and the parent organization must file a tax return for all subordinate bodies. When these conditions are met, individual subordinate organizations aren't required to file a separate tax return.

When filing a tax return, there are a variety of IRS forms that nonprofits should be concerned with - let's take a look.

Form 990

IRS Form 990, Return of Organization Exempt from Income Tax is applicable to nonprofits with gross receipts equal to or more than $200,000, and total assets equal to or more than $500,000. When completing this form, an organization must include its mission, the names of its board members, donors, and foundations, and the amounts of any donations and grants received.

Form 990-EZ

IRS Form 990-EZ, Return of Organization Exempt from Income Tax is a simplified and shorter version of IRS Form 990. This version of the form can be used by nonprofits with gross receipts of less than $200,000, and total assets of less than $500,000.

Form 990-N (e-Postcard)

IRS Form 990-N, sometimes referred to as the e-Postcard, is the most simple version of IRS Form 990. Organizations eligible to file the e-Postcard have gross receipts that are normally equal to or less than $50,000. Filing of IRS Form 990-N is completed entirely online. Some nonprofits are forbidden from filing the e-Postcard regardless of their financial situation. Forbidden organizations include 509(a)(3) supporting organizations, 527 political organizations, and 4947(a)(1) charitable trusts treated as private foundations.

Form 990-PF

IRS Form 990-PF, Return of Private Foundation is required to be filed by private foundations regardless of financial status. When completing this form, private foundations must share details surrounding their charitable distributions, investments, and compensation to employees.

Form 990-T

IRS Form 990-T, Exempt Organization Business Income Tax Return can be used by nonprofits to declare unrelated business income (which may be subject to income tax), charitable contributions, and potential net operating losses.

Form 1120-POL

IRS Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations is applicable to nonprofits that are political in nature, hence its name. Under section 527 of the IRC, organizations must report taxable income and liability, and if they have any taxable income related to their political nature.

Form 4720

IRS Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code goes hand in hand with IRS Form 990-PF. This form is divided into three sections: Taxes on Organization, Taxes on a Manager, Self-Dealer, Disqualified Person, Donor, Donor Advisor, or Related Person, and Tax Payments. IRS Form 4720 is used exclusively by private foundations.

Form 7004

IRS Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns can be used by nonprofits to request an extension to the period of time they're allocated to file a variety of IRS forms.

Form 8868

IRS Form 8868, Application for Extension of Time To File an Exempt Organization Return allows an organization to request an automatic extension of 6 months to file its tax return. Trustees filing IRS Form 1041-A or IRS Form 5227 must use IRS Form 8868 to request a filing extension for these forms.

Filing a Nonprofit Tax Return Efficiently

With the relevant forms explained, here are the steps that a nonprofit can take to file a tax return efficiently:

1. In-House or Tax Professional?

Before a tax return is completed and filed, nonprofit organizations should decide whether it'll be taken care of in-house or by an external tax professional. Nonprofit tax returns can be a long and complicated process, often requiring specific knowledge and expertise. If this knowledge and expertise isn't available in-house, it's best to consult with an external tax professional for support.

2. Choose the Appropriate Form

Regarding nonprofit tax returns, the IRS has different forms based on gross receipts and total assets. By consulting the gross receipts and total assets information related to your nonprofit, you can choose the appropriate form for your tax return:

• Form 990-N: Gross receipts normally ≤ $50,000.
• Form 990-EZ or Form 990: Gross receipts < $200,000, and total assets < $500,000.
• Form 990: Gross receipts ≥ $200,000, and total assets ≥ $500,000.
• Form 990-PF: Private foundation - regardless of financial status.

3. Collect Relevant Information

Regardless of the form that your organization has to fill out, there will be a lot of information that is required by the IRS. For IRS Form 990, you're likely to need the following information:

• Your organization's revenue, expenses, liabilities, and assets.
• A list of activities your organization carried out throughout the year.
• The mission statement of your organization.
• Achievements that support your organization's tax-exempt status.
• Information relating to directors and employees.

4. Carefully Follow Instructions

Be sure to read through the instructions on each relevant IRS form carefully. If mistakes are made, the IRS will return your forms accompanied by a letter that explains any required changes. It's best to avoid this situation, if possible, because tax return delays can lead to other issues within your organization.

5. File Electronically

The Taxpayer First Act, which was signed into law in 2019, requires all tax-exempt organizations to file series 990 forms electronically. This means they must be submitted online.

Common Nonprofit Tax Filing Mistakes and How to Avoid Them

Filing a tax return for a nonprofit isn't always straightforward. It can be a difficult and tedious process, which leaves room for mistakes to be made. Below is a list of common mistakes made while submitting nonprofit tax returns and how you can avoid each of them:

1. Not Filing or Missing the Deadline

It would be a huge risk, as a nonprofit organization, to neglect filing a tax return. This can be met with serious consequences and can even result in the termination of a nonprofit's tax-exempt status. This also applies, to a lesser extent, to organizations that miss the tax filing deadline. To avoid this mistake your organization should have a clear plan going into each fiscal year. The plan should contain a detailed section about how tax season is going to be approached.

2. Wrong Form

When filing nonprofit taxes, it's possible to submit an incorrect form based on the financial status of your organization. To avoid this mistake your organization should assess its financial status, focusing on gross receipts and total assets, and choose the appropriate series 990 form.

3. Not Consulting a Tax Professional

It's been mentioned multiple times in this article, the tax return process for nonprofits has the potential to be tricky to take care of in-house. Some organizations will attempt to file their return without consulting a tax professional and this can result in mistakes and delays. To avoid this mistake your organization should consult with a tax professional unless absolutely certain that it has the in-house resources to complete the process competently.

4. Lack of Records

The nonprofit tax filing process requires a lot of information relevant to your organization. Organizations can struggle to collate all the necessary information if they aren't keeping records throughout the year. To avoid this mistake document everything. File all paperwork away and label it clearly. By doing this, you'll be able to easily locate any additional information required to complete your nonprofit tax return.

5. Not e-Filing

The Taxpayer First Act, signed into law in 2019, requires all tax-exempt nonprofits to file their returns electronically. By filing any other way, your organization will not be adhering with this law. To avoid this mistake your organization can refer to the list of IRS authorized e-file providers and choose an appropriate option for e-filing.

Maintaining Tax-Exempt Status

Tax-exempt status is crucial to the continued operation of a nonprofit, and therefore it's an important status to maintain. First and foremost a 501(c)(3) organization should continue to serve a charitable purpose such as religious, educational, or scientific. Having a charitable purpose is non-negotiable, a nonprofit cannot begin with a charitable purpose and move away from it in the future. Its purpose must remain consistent and in line with IRS guidelines for the entirety of its existence.

Nonprofits operating under section 501(c)(3) of the IRC are required to file an annual tax return. Failure to carry out this task can result in the termination of an organization's tax-exempt status. Nonprofits that engage in fundraising must document all donations, and must be prepared to provide a form of donation receipt to all contributors. Keeping track of this information can be made easy through the use of fundraising tools like Paybee.

Lobbying laws relating to tax-exempt status are strict. 501(c)(3) organizations are prohibited from influencing legislature as a major part of their activities, and engaging in any campaign activity for or against political candidates. Lobbying activities must remain within a certain threshold of a nonprofit's receipts. If this threshold is broken then the organization will be deemed to have over-participated in this type of activity.

If applicable, nonprofits must pay income tax on unrelated business income. As mentioned earlier, IRS Form 990-T can be used to declare unrelated business income. Tax must be paid on this type of income because it doesn't relate to the charitable purpose of the organization. Tax-exempt status only applies to revenue generated through charitable means.

FAQs

Q: What documents are necessary for filing taxes for a nonprofit?

A: The absolute, most necessary documents for nonprofit tax filing are the series 990 forms. Depending on the financial status of your organization, it'll need to file IRS Form 990, IRS Form 990-EZ, IRS Form 990-N, or IRS Form 990-PF, and possibly IRS Form 990-T if there is unrelated business income to declare. Series 990 forms require nonprofits to submit all the critical information surrounding their operations as a tax-exempt organization.

Q: How do you accurately complete IRS Form 990 for a nonprofit organization?

A: There's a list of key information required to fill out IRS Form 990 accurately earlier in this article. Here's a concise version: revenue, expenses, liabilities, and assets, organizational activities, mission statement, achievements to validate tax-exempt status, and employee information.

Q: What are the filing deadlines for nonprofit tax returns, and how can extensions be requested?

A: The deadline for filing a nonprofit tax return is the 15th day of the 5th month following the conclusion of the organization's fiscal year. In most cases, the deadline is the 15th of May (based on an aligned fiscal and calendar year). If your organization would like to request an extension to this deadline, IRS Form 8868 can be used.

Q: What tips can help ensure accurate and timely tax filing for nonprofits?

A: Here are some tips to help ensure an accurate and timely nonprofit tax return: consult with a tax professional, choose the appropriate series 990 form based on your organization's financial status, gather relevant information ahead of filing, carefully follow the instructions detailed in the form, and file electronically.

Take Time; Take Care

The nonprofit tax filing process is surrounded by many guidelines and legal stipulations, all of which are put into place by the IRS. These guidelines and legal stipulations require strict adherence, and serious repercussions can meet organizations that fail to take the time and care required to file their tax return correctly.

In this article, we've covered a variety of topics in the nonprofit tax return space. We've looked into the tax requirements of nonprofits, the steps required to file a nonprofit tax return, common mistakes to avoid during the process, and how to maintain tax-exempt status. All of this information is critical to ensuring that your organization is able to file a timely and thorough tax return when tax season rolls around.

Information and documentation plays a vital role in the nonprofit tax return process. Keeping track of donations is one of the most important records that your nonprofit will need to maintain. Fundraising tools, such as Paybee, can help simplify this process. Paybee is an all-in-one nonprofit fundraising platform; it can maintain donation records, facilitate virtual fundraising events, secure payment processing, guest management, and much more. Contact Paybee and sign up for the demo.

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