A Few Things You Should Know About Taxes on Nonprofits
There are few things in this life that are supposed to be certain, and taxes are one of them. As it turns out, they’re not so certain for some organizations. Nonprofit organizations are generally exempt from rendering tribute to the U.S. federal government. That being the case, they still have some very important hoops to jump through. Let’s take a basic look at how nonprofit taxes work.
Does My Nonprofit Have to Pay Taxes?
This is not as simple a question as it first appears. Many organizations simply assume that they don’t need to worry about the IRS. That’s a pretty dangerous assumption.
The first thing you absolutely need to know is that while your organization may be exempt from paying federal and state income, property, and sales taxes, you’re not completely off the hook. You still need to cover the usual employee taxes. That includes Social Security and Medicare.
Also, tax laws differ from state to state in the USA. So while you may not owe much to the IRS, your state treasurer may be expecting something for some reason. Always check up on all applicable local laws.
Aside from those possibilities, knowing whether your organization will owe the IRS depends on what you’re organized to do. Investopedia explains:
To be exempted from federal taxes, nonprofit organizations have to meet certain rules. Some of these rules include:
- Being organized and operated exclusively for charitable, scientific, religious or public safety purposes.
- Collecting income and turning over entire amount less expenses to organizations or individuals who are lawfully recognized as legitimate charities.
If a nonprofit organization engages in activities that are unrelated to their basic purpose, they are required to pay income taxes on that money. For example, if nonprofit organization ABC was formed to provide shelter for the homeless and it makes some money selling bicycles, that income may be eligible for income tax purposes.
Make sure that your organization structures its finances properly to avoid any conflicts regarding nonprofit taxes.
Does a Nonprofit Have to File With the IRS?
Long story short, yes!
Regardless of whether your nonprofit has to pay any kind of federal taxes on income (which it most likely won’t), it still needs to report to the IRS every year.
This reporting is essential if you want to maintain tax-exempt status. Any 501 (c)(3) or tax-exempt nonprofit organization that fails to file with the IRS in a given year will lose its tax-exempt status. This is a common problem, and in some years, over half a million such entities in the USA automatically lose their tax exemptions for that exact reason. Sometimes that’s just because the organization ceases to operate, leaving no reason to file again. Carelessness also plays a role, though, and the consequences can be disastrous.
There are a few exceptions to the rule that nonprofits still have to file. Religious organizations almost never have to report anything to the IRS. Government-chartered corporations and services don’t either, and nor do organizations that are just subsidiaries of a larger nonprofit. In the latter case, the umbrella organization will generally file on behalf of all the organizations beneath it.
What IRS Forms do Nonprofits Use?
All reporting nonprofit organizations that seek to maintain their tax-exempt status each year need to file some version of an IRS Form 990.
Form 990 and its variations are informational returns. They provide the IRS with details about the nonprofit’s finances, as well as the organization’s purpose and operations. It helps the IRS evaluate whether the organization merits exemption from federal and state taxes.
There are several different variations of Form 990, and the one you’ll use depends on your nonprofit’s receipts. The IRS provides details about these variations here. In general, though, If your gross receipts are over $50,000 per year, you’ll file a standard Form 990 or a 990-EZ. For less than that amount, you’ll need a Form 990-N. If your nonprofit is specifically a private foundation, though, you’ll use a Form 990-PF, instead.
Keeping your Nonprofit Taxes in Order With SyncLedgers
While SyncLedgers won’t fill out your form 990 for you, we will work hand-in-hand with your CPA at tax time. SyncLedgers makes nonprofit taxes easy by helping you keep constant track of all your organization’s receipts and outlays. We keep everything chronological, categorized, and in balance with our outsourced bookkeeping solutions. At tax time, it’s just a matter of handing over all the work we’ve done throughout the fiscal year. And you’ll be able to see the results every step of the way. Contact us today to make sure your nonprofit taxes reflect the most accurate financial picture possible!