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A Basic Tax Guide for Nonprofit Organizations

Professional headshot of Jorge Diaz wearing a suit and tie

Jorge Diaz

January 8, 2021

Nonprofits, while tax-exempt, still have to file all the proper information with the IRS to clearly highlight their finances and programs.

It’s well-known that many nonprofit organizations are exempt from paying various federal income taxes under the IRS tax code section 501(c). However, this doesn’t mean that they have no responsibilities when tax time comes around.

In fact, nonprofits are tasked with providing many details about their organization’s activities each year, including finances and program information—even if they don’t actually pay taxes.

Here is a guide to nonprofit tax reporting, including an overview of tax exemption, form 990, and the information the IRS needs from nonprofits.

Tax-Exempt Status

So, what does being tax-exempt really mean for both state and federal taxes? If an organization has a nonprofit status, they may be exempt from state sales, property, and income tax but, according to the IRS, that status alone doesn’t automatically make them exempt from federal income tax. For federal tax exemption, nonprofits must apply for recognition from the IRS and receive a letter that states they are tax exempt.

Exempt organization types include those that operate solely for religious, charitable, scientific, or public-safety purposes, as well as literary, educational, or similar services. Some political organizations may also be eligible for an exemption.

To maintain their tax-exempt status, nonprofits cannot turn over any of their earnings to any private shareholder or individual. In addition, the nonprofit cannot “attempt to influence legislation as a substantial part of its activities” or participate in political campaigns, which is called an “action organization” (lobbying).

Form 990

Form 990 is the IRS reporting document that all tax-exempt organizations must use each year when filing their tax return. This form is then available to both the IRS and the general public, so that the nonprofit’s activities can be viewed and accessed, in addition to its mission and finances.

There are a few different types of form 990, including:

Form 990

Form 990-EZ

Form 990-N

Form 990-PF

Typically, larger nonprofits that have more than $50,000 in gross receipts file either the form 990 or the 990-EZ. Smaller nonprofits with gross receipts of $50,000 or less can file form 990-N. Private foundations file form 990-PF.

Do all Nonprofits have to File a Form 990?

Though most nonprofits must file an annual return, there are some types of nonprofits that are not required to file a form 990 at all. These include organizations like religious organizations, some state institutions, and some governmental units. A full list can be found on the IRS website.

If a nonprofit organization fails to file a form 990 when it is required to do so, penalties will be imposed from the IRS. And, the IRS states that if filings for three consecutive tax years are missed by an organization, its tax-exempt status is automatically revoked. The IRS cannot undo a proper automatic revocation by law—and to get tax-exempt status again, the organization has to reapply.

Information Nonprofits Must Provide to the IRS

Form 990 includes information about a nonprofit’s operations, including its mission, programming, finances, and other details about the way the organization is run. This document is intended for both the IRS and the public to view. The community can fully observe the nonprofit’s impact and their sustainability, and this transparency drives decisions from both individual and organizational donors.

The 990 summarizes the activities of the previous year, essentially making the organization’s case to continue operating and maintaining its tax-exempt status. Donors can view these forms online if they’re interested in providing support to a nonprofit, and it allows them to see where the organization gets its revenue, what its expenses are, and if it has any cash reserves.

In addition, details like what nonprofit employees are paid and a list of board members are also included in the reporting, which further opens up the nonprofit for public scrutiny.

Nonprofits have a big advantage come tax time in that many are exempt from paying federal income taxes and state taxes. This is intended to help these organizations continue to be sustainable as well as support the charities and causes that need their help.

However, it’s important to remember that there are still tax responsibilities for nonprofits, including filing the 990 form each year and maintaining the tax-exempt status.

If you have questions about your tax responsibilities, the experts at Calloway Tax Advisors can help.

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