Tax Form & Compliance After Obtaining 501 Status
Filing your IRS Tax Form 990 is vital to keeping your 501c3 status
Your dream has become a reality. The cause that is your passion has been transformed
into a functional organization. You’ve established a board, clarified your mission, adopted bylaws, incorporated, and achieved 501(c)(3) status from the Internal Revenue Service. While extensive efforts have been undertaken to bring the organization up to par with the standards expected of a quality organization within the nonprofit sector, assiduous attention to compliance issues must take place if the organization is to remain reputable. Thus, organizational administrators must be diligent in educating themselves on all state and federal regulations and their respective IRS tax form.
General nonprofit tax questions
First and foremost, as mandated by state and federal statutes, an operating nonprofit organization must assume the maintenance of adequate financial records. It is imperative that administrators, both at the board and staff level, document all sources of receipts and expenditures. A sufficient electronic donor database is ideal, though not authoritative. It is, however, critical to retain all supporting documents, such as grant applications and award notifications, sales slips, paid invoices, deposit slips, and cancelled checks. This will allow for easy preparation of financial statements, include statements of activities (known as an income statement in the for-profit world) and statements of financial position (also known as a balance sheet).
The IRS itself or a tax professional is where to get tax forms from once it is time to file. A 501(c)(3) organization’s annually mandated filing with the IRS is the tax form 990. As of the 2007 fiscal year all organizations are required to file, regardless of revenue; however the version of the form will differ based upon the year’s total receipts. The filing is due on the 15th day of the 5th month after the fiscal year end (For example, if the fiscal year ends December 31, the 990 is due on May 15th), but it may be submitted anytime after the fiscal year end. To remain in full compliance, administrators must be aware of all forms and schedules that must be filed, including the 990-T for unrelated business income, and special filing requirements for supporting organizations.
In addition to annual reporting, organizations with paid employees will be faced with additional quarterly filings. Like all employers, charities who pay wages must withhold, deposit, and pay employment taxes, including federal income tax withholding, Social Security, and Medicare (FICA) taxes. This must be done for each individual paid more than $100 per year and reported on form 941. To know how much income tax to withhold, an organization should have a Form W-4, Employee’s Withholding Allowance Certificate, on file for each employee. Public charities do not pay federal unemployment (FUTA) taxes.
In addition to IRS compliance, some states, though not all, will require annual state level tax filings. Upon commencement of the activities, organizational administrators must be sure to obtain state level sales and income tax exemptions, if they are available in their state. If the organization is not granted state exemption, they must file and pay taxes! In some states, even organizations exempt from state taxes must still file some form of annual return.
The tax form and the annual report
In addition to state tax considerations, each year the organization must file an annual report with their state to remain an active corporation. While these forms typically require a minimal amount of information, failure to file may lead to an administrative dissolution of the organization.
A final state level compliance issue to remain abreast of is concerned with charitable solicitation registration requirements. Such laws have been implemented in most states in an effort to protect consumers, and the statutes require charitable organizations to register and become licensed prior to the initiation of any solicitation activities. Generally, these laws require charities and their fundraisers to register with the state, describe their fundraising activities, file financial documents, and pay a fee that covers the administrative expenses of monitoring charities. These registrations typically require annual renewal, and come with stiff penalties for violations. If an organization will solicit in more than one state, a valid registration must be in place in each state where representatives will seek donations.
Possibly most importantly, you must remain aware of what activities may jeopardize your exempt status. The most common offenses that lead to the revocation of a 501(c)(3) are private inurement and political campaign intervention. Private inurement occurs when an insider receives excess benefit from the existence of the organization, either in the form of direct financial gain or in more indirect means such as the provision of business to a for-profit in which an insider has an ownership interest. Excess benefit may also occur in transactions with outsiders, however the benefit in the situation must be substantial. Lobbying activities, or attempts to influence legislation, may be conducted; however these activities must be kept to a minimum.
501(c)(3) nonprofits are strictly prohibited from undertaking any political campaign intervention. While organizations may provide voter education or a review of the issues supported by all candidates, a public charity may not, directly or indirectly, support or oppose any candidate for political office. Lobbying activities, or attempts to influence legislation, may be conducted; however these activities must be kept to a minimum.
Finally, organizations must be diligent in filing annual returns on a timely basis each year. Not only can the IRS revoke the exempt status of any organization that fails to file returns for more than two years, it also reserves the right to impose penalties upon late filers. While an organization may not have a federal income tax obligation, the standard penalty for late filing of the annual information return is $20 per day, up to a maximum of $10,000 per year.
Remaining in compliance after attainment of 501(c)(3) status may seem a daunting task; however with careful attention and cooperation of organizational administrators and their staff, exempt organizations can function successfully and fulfill their missions abundantly.
Where to get income tax forms for your nonprofit?
If you are in need of the tax form required for your nonprofit, visit the IRS tax form webpage, reach out to a certified public accountant or tax professional. In fact, you can find federal tax forms locally at the post office near you and research your local United Way for resources to ask IRS questions free of charge. Discussing your tax questions with a professional can save you a lot of headache in the long-run.