In the United States, most tax-exempt nonprofits are expected to file annual tax returns. Some organizations who are not mandated by law to file a tax return include churches and affiliated organizations, select state institutions, 501©(1) corporations organized under an Act of Congress, and some organizations that earn less than $50,000 in gross receipts.
However, once any eligible nonprofit organization fails to file taxes using the IRS Form 990 three years in a row, the IRS will automatically revoke its tax-exempt status. Note that since 2011, over 500,000 nonprofits across the country automatically lost their tax-exempt status for this reason.
Also note that the IRS has no appeal process for automatic revocations due to failure to file appropriate taxes or Form 990 for three years. Without this status, your nonprofit organization could be subject to paying income taxes. In addition, you can avoid paying user fees and filing additional documents with the IRS by submitting your Form 990 each and every year.
In the United States, IRS Form 990 is the tax document that federally tax – exempt organizations file each year with the IRS. This includes charitable nonprofits. The IRS and the public can evaluate nonprofits and how they operate just by examining their 990s. Have it in mind that this form collects information about the mission, programs, and finances of tax-exempt organizations.
The 990 is also known to give each nonprofit the opportunity to report what it achieved the prior year, thus making a case for keeping its tax – exempt status. But due to recent revisions, Form 990 collects even more information such as disclosure of potential conflicts of interest, compensation of board members and staff, and other details having to do with financial accountability and avoidance of fraud.
Note that you are expected to file your 990, 990 – EZ, 990 – N, or 990 – PF by the 15th day of the 5th month after your accounting period ends. So, if your fiscal year ends on December 31, the 990 is due on May 15 of the following year. Two ninety – day extensions are allowed, except for 990 – N (postcard) filers.
The 990 – N is a postcard with minimal information that can be filed electronically. Have it in mind that if you lose your exempt status by not filing the 990, your nonprofit could have to pay income taxes, user fees, and have to file additional paperwork.
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Reasons Why Your Nonprofit Could Lose Its Tax Exemption
Aside failing to file taxes on time, there are other ways a non – profit organization could lose its tax exemption in the United States. They include:
Failure to Pursue Original Purpose
Non – profit organizations that apply for tax exemption, state that their purpose lies within one of the following categories: “Charitable, religious, educational, scientific, literary, testing for public safety, foster amateur sports competition, prevents cruelty to children or animals.” Have it in mind that once the purpose changes, an organization is expected to notify the IRS.
Political Campaign Activity
Nonprofit 501© (3) organizations are mandated not to endorse or oppose any candidate for public office at the local, state, or federal levels. This includes contributions to a political campaign and even public statements for or against a candidate. Note that any violation can cause the IRS to strip a 501© (3) of its tax-exempt status. Also note that a 501©(3) organization is only allowed to invite a political candidate to speak at an event only if no fundraising occurs, if an equal opportunity to speak is extended to other candidates seeking the same office, and if the organization does not indicate support for or opposition to any candidate.
Private Benefit or Inurnment
Have it in mind that one unique way a non – profit differs from a for – profit organization is that it does not benefit any person or organization. A non – profit organization is expected to solely serve the public good. Nonprofits can indeed make profits, but they can’t pay them to individuals. They are expected to channel them back into the organization’s activities. However, they can pay reasonable salaries to staff.
Inurnment itself goes even further than private benefit by prohibiting a non – profit’s income or assets going to insiders such as board members, officers, directors, or important employees. Note that the organization’s property, for instance, cannot be sold to an insider below market value. In the United States, this requirement is “absolute,” which means that any such payment or sale could result in the IRS stripping an organization’s exempt status, and the insiders involved could be subject to penalty excise taxes.
In the United States, an organization lobbies when it tries to influence legislation. Some lobbying is allowed under certain circumstances. But to ensure an organization keeps its status, it’s imperative not to lobby at all nor encourage anyone involved with your non – profit to support, propose, or oppose any legislation. Once a non – profit engages in too much lobbying, the organization can be stripped of its exempt status and face a fine. Nonprofits are expected to differentiate between advocacy and lobbying. The first is permissible. The second is not acceptable.
Nonprofits engage in advocacy frequently by speaking in favour of an issue, recommending specific actions, arguing for a cause, supporting or defending actions or opinions, or pleading on behalf of others. Also note that advocacy may include public education, nonpartisan voter registration, nonpartisan voter education, litigation, and more. Lobbying, however, involves communicating with decision – makers such as elected officials and their staff about existing or potential legislation and asking those decision – makers to vote for or against a measure. Disallowed lobbying must include three things: decision – makers, legislation, plus asking for a vote one way or the other
Typically, this area of unrelated business income tends to be more complex than other factors mentioned above. Still, on a basic level, it means that a 501© (3) non – profit organization may not receive income from a regularly – carried – on trade or business that is not related to its mission. Note that if an organization earns more than $1000 of UBI, it is expected to file IRS Form 990 – T (Exempt Organization Business Income Tax Return). Too much UBI can threaten its tax – exempt status. Also note that if an organization generates funds from a business activity, but it’s not regular, it may have to pay taxes on that income. Nonetheless, that won’t jeopardize the organization’s tax – exempt status. An example would be selling merchandise once a year at a fair.
All nonprofits must file a 990 form annually. However, the type of 990 filed depends on the organization’s size. Non – profit organizations are required to make their 990 and their exemption application available for public inspection without charge at their regional and district offices during regular business hours. A non – profit’s 990 can provide valuable information for donors and grantors such as foundations, governments, and corporations. Since the 990s are public documents and widely available in United States, non – profits should be diligent about filling them correctly and filing them on time.