A Brief Guide to Nonprofit Tax Returns: Tips for Filing

A Brief Guide to Nonprofit Tax Returns: Tips for Filing

It’s been a successful year of fundraising ventures and your nonprofit is doing better than ever. Your mission is on track, the community resonates with your message and every fundraising event you host seems to draw more and more attention to your cause, and more money to fund your projects. 

This is all great, and it’s wonderful that your organization is doing so well, but what does your tax compliance look like? Are you staying on top of your tax filing requirements with the IRS, or is your organization slipping up in this regard? Maintaining tax compliance is a big thing, even if your nonprofit has tax-exempt status. If you don’t get things under control real soon, your nonprofit could lose its 501(c)(3) status, and you don’t need that headache, because reinstating it will be a long, hard road to walk down.

Did you file Form 990 this tax season? Completing your annual returns is part-and-parcel of maintaining your nonprofit’s state and federal tax compliance. If you want to maintain your organization’s good standing with the government and the Internal Revenue Services, you need proper nonprofit financial reporting to ensure complete transparency with your financial operations.

Nonprofit tax filing responsibilities aren’t something you can sweep under the rug and worry about when the authorities reach out to you, by then it’s way too late and you’re in the hot seat. 

Understanding Nonprofit Tax Forms

Do you know which IRS nonprofit tax forms apply to your organization to maintain your nonprofit tax compliance? If you don’t, it’s time to figure this beast out before it sinks the ship in a financial maelstrom you can’t escape. 

When it comes to understanding nonprofit tax forms and how they apply to your organization, Form 990 is your go-to compliance document. It’s the primary form you use to give the IRS your annual information return to maintain your 501(c)(3) status. Form 990 covers your nonprofit finances, programs, and operations, and it’s a key component of public and government transparency commitments from your organization. 

If your nonprofit brings in $200,000 or more in annual fundraising revenue and your assets have a collective value exceeding $500,000), use Form 990. If your nonprofit holds assets and takes in revenue under the amounts we just covered, then you can use Form 990-EZ to handle your nonprofit tax obligations with the government.

Let’s not confuse Form 990 with Form 1023, your application for 501(c)(3) tax-exempt status. Different IRS compliance forms serve different purposes but align under the single banner of meeting your nonprofit tax obligations and showcasing your organization's commitment to transparency and accountability with donors, stakeholders, and the public.

IRS Form Requirements for Filing Nonprofit Taxes

Just because your organization is tax-exempt doesn’t mean you can shy away from filing tax returns for nonprofits. If you want to maintain your nonprofit tax exemption you’ll need to file annually with the IRS, but the good news is that the rules differ for organizations of different sizes. If your nonprofit's gross receipts consistently fall under the $50,000 threshold, you can save yourself time and hassle by filing via the streamlined Form 990-N, or e-Postcard.

The IRS doesn’t require religious organizations, like churches and their integrated auxiliaries, to submit annual returns. But before you think you’re off the hook and the paperwork doesn’t apply to your nonprofit, understand that record-keeping is still key for maintaining transparency, trust, and credibility with your donors and supporters.

Is your nonprofit still in its first three years of operations? If that’s the case you can adjust the thresholds for your gross receipts. For these smaller organizations, the gross receipt thresholds are adjusted. If you average less than $5,000 in gross receipts yearly your organization could qualify for nonprofit tax exemption without the need to report annually to the IRS. That said, you’ll need to maintain proper nonprofit tax submission and nonprofit tax reporting to qualify for a filing exemption.

Filing ensures your tax-exempt organization stays in compliance with the IRS and the state and federal government, avoids penalties, and maintains its eligibility for any future tax benefits. 

Common Challenges in Nonprofit Tax Filing

It’s surprising how many organizations experience nonprofit tax filing problems, it’s way more common than you think. Late filings are a common issue with nonprofits, especially smaller organizations and nonprofits undergoing management changes or exponential growth in fundraising activities. 

Missing a deadline is just something that you can’t afford to do or you put your IRS standing at risk and trigger heavy IRS penalties that most organizations can’t afford to pay. Another frequent misstep that nonprofits make, and one that you need to avoid at all costs,  is underreporting income collected during the financial year.

Whether that’s due to an innocent oversight or miscalculation, if you don’t account for every dollar you raise and add it to your filing, then the IRS will figure it out and you’ll land up in hot water. How do you prevent these nonprofit tax mistakes from manifesting? It’s a simple fix. Hire specialist nonprofit accountants or tax advisors to keep your books, compile your annual reports, and complete the filing process. 

Some nonprofits make the mistake of assuming that tax-exempt status covers all nonprofit activities but improper reporting of unrelated business income always leads to unexpected issues with tax compliance. 

The last thing you need is the IRS notifying you of an upcoming audit because you submitted incomplete or inaccurate forms with missing schedules or incorrect income reporting. That’s why hiring professionals is a must to mitigate tax return issues and maintain compliance.

How to Prepare and File Nonprofit Tax Returns

Mastering the nonprofit tax filing process takes organization and expertise with your nonprofit tax preparation. You’ll need nonprofit financial documents like your income statements, expense records, and documentation for grants or donations received during the financial year. Remember that missing or incorrect information will attract the attention of the IRS and set your organization up for an audit.

What form do you need to submit? Depending on the size of your nonprofit you’ll submit Form 990, Form 990-EZ, or Form 990-N. You’ll need to understand the rules surrounding IRS deductions and which deductions apply to your organization. This is another step in the reporting and compliance process where the expertise of professional nonprofit accountants is invaluable. They’ll double-check their work for errors, missing information, and any overlooked deductions to avoid making costly mistakes that attract the attention of the auditing team at the IRS. Hiring a professional to maintain your finances ensures the filing nonprofit taxes process is handled efficiently and properly from start to finish.

Importance of Timely Nonprofit Tax Filing

There are serious consequences and steep financial penalties if you don’t maintain compliance and your organization could even end up losing its tax-exempt status. The IRS has strict filing deadlines for nonprofits so mark them on your calendar. 

Losing tax-exempt status is every nonprofit’s worst nightmare and makes it liable for income taxes. Not only will you be facing nonprofit tax penalties, potential audits, and all the headaches that come with trying to reapply for your exemption, but you’ll also lose donor trust in how it handles finances. 

If the IRS goes as far as revoking tax exemption status for your organization you could spend months, or even years, trying to reinstate it. In some cases, reinstatement isn’t an option and the only way out is to dissolve the organization. 

If the organization is falling behind in your compliance and tax obligations and you know you’re going to miss the deadline, make a preemptive move and reach out to the IRS for a deadline extension. File IRS Form 8868 as a short-term solution to give you more time to prepare and submit your annual returns.

Conclusion and Best Practices for Nonprofit Tax Filing

If you don’t have any experience with nonprofit tax filing the thought of submitting your returns might feel like scaling the peaks of Mount Everest, and you might decide to procrastinate on the task. Don’t fall into that trap. 

Strong financial recordkeeping and accurate, well-organized nonprofit tax best practices prevent costly errors and simplify the filing process to keep your organization compliant. One of the biggest nonprofit tax filing tips we can give you is to train your team on nonprofit tax compliance best practices and how to prepare and file the right forms. 

If you don’t have the skills to review your books and reconcile accounts, engage a seasoned tax professional who operates in the nonprofit sector and has a track record of success in handling nonprofit tax compliance. Stay ahead of the curve by delegating the preparation and submission of your tax responsibilities to a professional.

While your nonprofit might be tax-exempt, you’ll need to put in the compliance work to maintain that status, or you’re risking the very livelihood of the organization. Stay safe, and stay compliant.

A Brief Guide to Nonprofit Tax Returns: FAQs

How do I know if my nonprofit organization is required to file taxes?

Does your nonprofit collect more than $50,000 in annual revenue? You’ll need to file annual returns with the IRS to maintain compliance and your nonprofit tax-exempt status. If you’re uncertain if you need to file because you’ve heard that some smaller nonprofits don’t need to bother with it, consult a professional tax specialist to get the full picture of your compliance responsibilities. 

What happens if my nonprofit misses the tax filing deadline?

You really don’t want to miss the filing deadline. The IRS will slap your nonprofit with severe financial penalties, and you run the risk of the tax man auditing your nonprofit. Even if everything is above board, an audit is a painstaking process that you’ll wish you never went through. Imagine if your donors hear that your nonprofit is under investigation or going through an audit, how do you think they’ll respond? Chances are it won’t be good. File Form 8868 and request an extension if you think you’ll file late this year.

Can a nonprofit organization lose its tax-exempt status if it fails to file taxes?

Yes. Filing late isn’t going to cost you your nonprofit tax-exempt status. But if you don’t file for three years in a row, the chances are the IRS will revoke your 501(c)(3) tax-exempt status and it will be a long, hard road to getting it back, if that’s even a possibility.