The primary objective of any nonprofit is to serve the community and promote welfare through their actions. However, ensuring tax compliance while pursuing these goals is essential. Though initially daunting, understanding IRS requirements empowers nonprofits, making the compliance process more attainable.
Let’s explore what nonprofits should do to adhere to tax filing guidelines.
Obtaining Tax Exemption – What is the Process?
Nonprofits are typically eligible for federal tax exemption, meaning they are not subjected to federal income taxes if they meet the criteria established. For these exemption purposes, the IRS has established a series of IRC sections to classify nonprofits, and most organizations are typically classified under 501(c)(3).
In order to obtain tax-exempt status under 501(c)(3), nonprofits are required to file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Upon acceptance of this application, the IRS will furnish a determination letter to the organization, granting them tax-exempt status.
990 Series Forms – A Deep Dive
Any nonprofit that obtains tax-exempt status will have an annual filing obligation. To fulfill that, they must file a 990 Form annually, reporting their income, expenses, assets, liabilities, activities, and more to the IRS.
There are different types of 990 forms available. Based on the organization’s financial standing and the primary source of funding, the organization must choose and file the applicable form.
- Form 990-N (e-Postcard): Small nonprofits with gross receipts of less than or equal to $50,000 must file Form 990-N with the IRS.
- Form 990-EZ: Nonprofit organizations with gross receipts of less than $200,000 and total assets less than $500,000 must file Form 990-EZ.
- Form 990: Nonprofit organizations with gross receipts greater than or equal to $200,000 (or) total assets greater than or equal to $500,000 must file Form 990.
- Form 990-PF: The nonprofits that are classified as private foundations by the IRS must file a Form 990-PF, regardless of their gross receipts.
- Form 990-T: This form is used by tax-exempt organizations to report income from a trade or business that is not related to their exempt purpose. If an organization’s total unrelated business income is $1000 or more, they must file Form 990-T.
Along with these, the organizations may also need to attach a few additional documents called Schedules, based on the data they report. For example, if the organization reports contributions of $5000 or more received from any one contributor, they will need to attach Schedule B. Similarly, if the organization is a hospital, they will need to attach Schedule H.
Significance of 990 for Nonprofits
While nonprofits are exempt from taxes, adhering to 990 compliance is inevitable, not just because it’s mandatory to maintain tax-exempt status but also because it holds the maximum significance in ensuring accountability and upholds positive public perceptions of the organization.
990 Compliance remains a cornerstone for every nonprofit organization for the following reasons:
- Form 990 serves as a demonstration of the nonprofit organization’s transparency in commitment and distribution.
- It establishes trust with donors, volunteers, and the community, showcasing that the nonprofit operates responsibly and in accordance with legal requirements.
- By ensuring 990 compliance, nonprofits can remain in good standing with the IRS.
Deadline and Penalties
Generally, the deadline to file the annual 990 series forms is the 15th day of the 5th month after the accounting period ends. This means,
- If the organization follows a calendar tax year, the deadline is May 15.
- If the organization follows a fiscal year, then the deadline will change accordingly. For example, if the organization’s accounting period ends in July, the deadline for filing 990 is December 15th. If this deadline falls on a weekend or federal holiday, then the form is due on the next business day.
Filing Form 990 is crucial for nonprofits, not only for the benefits and enhanced reputation it brings to the organization but also to avoid potential consequences if left unfiled.
If an organization fails to file the applicable 990 return on time, the IRS may impose a penalty ranging from $20 – $110. Furthermore, if the organization fails to file for 3 consecutive years, their tax-exempt status will be automatically revoked, meaning they will no longer be exempt from paying federal income taxes.
Note: For Form 990-N, there are no late filing penalties. However, automatic revocation will apply if the organization fails to file for 3 consecutive years.
The Option of Extending the Deadline
Just like the other income tax returns, the IRS allows tax-exempt organizations to request an extension of time if required.
To apply for an automatic 6-month extension of time to file their 990 return, the IRS requires tax-exempt organizations to file Form 8868 on or before the original due date. Remember, the IRS doesn’t require any explanation for requesting more time. Remember, it is always a better option to file an extension if you are concerned about missing the deadline. This will help your organization avoid potential IRS penalties and remain in good standing with the IRS.
E-file Mandate for 990 Forms
Gone are the days when nonprofits used to file their 990 returns on paper. The IRS mandates that nonprofits must file their 990 returns electronically. This means that every nonprofit will have to find a reliable e-file provider to meet their 990 compliance. While choosing the e-file provider, nonprofits should consider the following:
- Is the e-file provider IRS-authorized? This is a requirement for securely submitting forms to the IRS via their online system.
- Do they support all the necessary forms and Schedules?
- Do they have a reliable customer service?
- Is their solution secure, will it protect your information?
By asking these questions, nonprofits can identify a trustworthy e-file provider to help them take care of their 990 filing requirements efficiently.
Conclusion
While the objective of every nonprofit is to sere their community and forward their mission, tax compliance helps make this possible! Completing their 990 series return accurately and on time enables nonprofits to bolster their public integrity.
