If you have formed a nonprofit organization, you will want to know the filing requirements to help maintain your nonprofit and federal tax exemption status. Legal compliance for nonprofit organizations is compulsory, as it helps you remain tax-free. Failure to comply can get your approved charity status revoked, which means your donors won’t be able to get any tax deductions either. Ultimately, this will discourage them from funding your organization.
In this post, we cover the major compliance challenges faced by nonprofit organizations and what steps they could take to remain compliant.
Provide a Purpose that Fits IRS Code
Only a few specific types of organizations can get tax-exemption status under the Internal Revenue Code. The code defines nonprofit organizations as “any religious, charitable, educational, scientific, literary, public safety, national or international amateur sports competition organization.” Organizations that are working to prevent cruelty to children or animals are also considered a nonprofit organization.
Under the code, being charitable means an organization that provides relief to the poor, distressed, or underprivileged segments of the society. An organization working for the advancement of religion, education, or science can also get charitable status. Organizations working for establishing or maintaining public buildings, monuments, or works and, in turn, lessening the burdens of government and promote social welfare can also qualify as nonprofit organizations.
If you have achieved nonprofit status under any of the above categories, make sure that you maintain the conditions that originally qualified you for the status.
Keep Your Profits within the Organization
By definition, the purpose of nonprofit organizations is not to generate profits but work for the betterment of society. If your organization is conducting operations efficiently and starts generating any profits, then make sure that you keep them within the organization and don’t distribute them to any board members. Paying out dividends or distributing profits to employees, founders, or any other stakeholder is seen as non-compliance and gets the status revoked.
Refrain from Political Campaigning or Lobbying
Nonprofit organizations are expected to remain apolitical and cannot endorse, fund, campaign for, or otherwise support a candidate in a local, state, or national election. If the organization’s members or employees lobby for any political candidate, the organization’s nonprofit status can be revoked.
Pay Employee Taxes
Nonprofit organizations are required to deduct and submit payroll taxes on employees’ salaries. Just because the organization has tax-exemption does not mean that the employees are also free from income tax. All employees must be provided a valid Employee Identification Number as well, and taxes due must be withheld by the organization.
Submit Annual Reports
Even though nonprofit organizations do not have to pay any taxes, they are still required to submit annual reports of business operations to the Division of Charities or Office of the Secretary of State. These include the statement of business operations and asset & equity statement. A nonprofit is taxed at zero percent. Failure to submit the necessary financial reports can get the registration canceled, and taxes will be imposed on the organization as if it were a for-profit corporation.
Must Not Have Any Shareholders
A nonprofit organization must not register any shareholders or owners of the firm. Since the organization is not expected to pay out dividends, there is no need to create shareholders at any time.
Some nonprofits may be tempted to offer a share in the organization to a wealthy donor to acquire funds. The law expressly prohibits nonprofits from doing so, and no individual or institution can ever have an ownership stake in the organization. The only way to give share ownership to someone is by dissolving the nonprofit and restructuring it as a for profit organization.
Must Not Spend Funds on Unrelated Expenses
Nonprofit organizations are expected to spend their funding for the purpose outlined in their registration documents. They can spend money on fundraisers and events that help them generate more funds. But these funds must be ultimately spent on their stated cause.
The nonprofit must not engage in generating revenue from commercial activities, even if they intend to use these funds for their stated cause. For example, a nonprofit cannot engage in the production and sale of alcohol, toys, or shoes, etc.
They also cannot start service businesses like a transportation service or a food restaurant. They are prohibited from such commercial activities even if they can prove that the money generated through such activities will ultimately be spent on their stated purpose.
Maintain Complete and Accurate Records
Nonprofit organizations are expected to maintain accurate and complete financial records of their operations, similar to commercial companies. These include records of bills, invoices, checks, donations received, and other daily expenses for the organization.
Carry Out Board Meetings
While nonprofits do not have shareholders or owners, they are expected to create a board of members that holds regular meetings to decide on a course of action for the organization. A meeting must be conducted at least once per annum by the board. More regular meetings are encouraged but not mandatory for legal compliance in nonprofit organizations.
The board cannot decide to pay compensation or bonuses to one of the directors on the board for their direct or indirect service. However, the board can provide additional compensation to the CEO, who is not a member of the board.
Nonprofit organizations are allowed to keep paid employees as directors. However, the salaries of these employees are subject to regular income taxes. A nonprofit may also hire an independent, third-party contractor to perform services and compensate them at a reasonable rate.
To find more information on nonprofit and charity compliance matters and tax filings for your specific state, visit the IRS website. It isn’t difficult to maintain the legal compliance of your nonprofit organization, but you need to make an active effort to get the job done. The authorities provide plenty of help through IRS-Authorized e-file providers for this purpose.
Whether you are just starting out or run a well-established nonprofit organization, you should understand that maintaining compliance with the IRS is a process that will take time to set up. The ultimate reward is that you will have complete peace of mind about your organization’s tax-exempt status.
If you need more help on nonprofit compliance and startup, get in touch with our nonprofit specialists today! 877-857-9002