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- May 28, 2024
Tax Responsibilities for Nonprofits
Nonprofit organizations enjoy a lot of various text benefits under the IRS code. Whether they are doing charity, indulging in religious activities, or for any educational purposes. They enjoy these tax deductions under Section 501 (c) (3). But to get these benefits, they have to stay compliant with multiple tax laws. In this blog, we will take a look at these details and then some more.
So let’s get started.
What tax exemptions do Nonprofits get?
Nonprofits get exemption from federal corporate income tax on income they get from their charitable activities. However, to obtain this tax exemption, nonprofits must comply with multiple Internal Revenue Service (IRS) requirements. Let’s take a look at them:
If a nonprofit wants to claim these tax exemptions, all their activities must be related to one or more exempt purposes specified in Section 501(c)(3). In general, these purposes include (but not limited to) charitable, educational, religious or educational activities.
One more important condition is that the exempt purposes should be the primary activity of such organizations. What does this mean exactly? This means that all the daily operations of the organizations must be for the exempted purposes mentioned previously.
The organization must not distribute any part of its earnings to private shareholders or individuals. This ensures that all profits are used to further the nonprofit’s mission rather than benefiting private interests.
A nonprofit can engage in lobbying, but this must not represent a substantial portion of its activities. Excessive lobbying activity can lead to the revocation of tax-exempt status.
Nonprofits are strictly prohibited from participating in any political campaign for or against political candidates. This includes making donations to political campaign funds or making public statements in favor of or against any candidate.
Applying for Tax-Exempt Status
If a nonprofit wants to claim above mentioned tax-exempts, they have to apply for tax-exempt status. For this, they must file IRS Form 1023, or Form 1023-EZ for smaller organizations, to apply for tax-exempt status. This detailed application requires information about the organization’s structure, governance practices, and programs. The IRS reviews this application to ensure the organization meets all the criteria for tax exemption.
Approval of this application grants the nonprofit its tax-exempt status, allowing it to operate without paying federal income tax on qualifying activities. Regular compliance and adherence to the stipulated requirements are essential to maintain this status.
Annual Filing Requirements
Tax-exempt organizations must file an annual information return with the IRS. The type of form depends on the financial size of the organization. Organizations with total receipts of more than $200,000 or total assets over $500,000 must file Form 990.
Those with gross receipts under $200,000 and total assets less than $500,000 can file Form 990-EZ. Very small organizations with gross receipts of $50,000 or less are required to file Form 990-N, also known as the e-Postcard.
It’s crucial for nonprofits to adhere to these filing requirements. If any nonprofit fails to file for three consecutive years, it might lead to the revocation of their tax-exempt status.
Unrelated Business Income Tax (UBIT)
If a nonprofit organization engages in any business activities that are not closely related to its exempt purpose, the income from those activities may be subject to unrelated business income tax (UBIT). These activities must qualify as a trade or business, be regularly carried out, and not be substantially related to furthering the nonprofit’s exempt purpose. Proper reporting and payment of UBIT are essential for maintaining compliance with IRS regulations.
Recordkeeping and Transparency
Maintaining detailed records is critical not only for IRS compliance but also for ensuring transparency and accountability to donors and the public. Nonprofits should thoroughly document all receipts and expenditures, keep detailed records of all organizational activities, and retain copies of all filed tax returns and related IRS correspondence. This documentation supports the nonprofit’s financial statements and tax filings and demonstrates the organization’s commitment to regulatory compliance and operational transparency.
State and Local Compliance
Nonprofits must adhere to state and local tax laws in addition to federal regulations. This includes applying for state income tax exemptions, as most states require separate applications despite recognizing federal tax-exempt status. Nonprofits that own property may be eligible for property tax exemptions, which also necessitates an application to the relevant state or local taxing authority. Furthermore, some states offer sales tax exemptions for nonprofits, which generally require obtaining a state-issued certificate to purchase goods without paying sales tax.
Lobbying and Political Activity
Nonprofits need to carefully monitor their lobbying activities to ensure they do not exceed the thresholds set by the IRS, which could jeopardize their tax-exempt status. Additionally, nonprofits are strictly prohibited from engaging in political campaign activities. Participating in such activities is not allowed and can lead to the loss of tax-exempt status.
How CROWNGLOBE Can Help Nonprofits Stay Compliant
CROWNGLOBE is a leading firm in taxation, accounting, and bookkeeping that helps nonprofits save their tax dollars. We offer specialized services to help nonprofits stay compliant with federal and state regulations. At CROWNGLOBE, we assist nonprofits in filing the correct tax returns and applying for tax exemptions. We ensure that all nonprofits adhere to regulations regarding unrelated business income, lobbying, and political activities.
By choosing CROWNGLOBE’s services, nonprofits can focus more on their missions while we handle the complex tax work. This helps nonprofits maintain their tax-exempt status without the administrative burden.
Wrapping up
Nonprofits get excellent tax exemption benefits under various IRS laws. But as we all know, these laws and regulations are tricky. So, instead of going all in alone, it’s better for nonprofits to consult experts like CROWNGLOBE. Such experts can help them tackle all the nonprofit taxation complexities that might arise. At CROWNGLOBE, we’ve been offering taxation services to numerous nonprofits.
During their time with us, we have helped them save thousands of tax dollars and stay compliant with the regulations. If you, too, operate a nonprofit and want to fix your tax-related issues, do not hesitate to reach out. Our experts are here to help. Give us a call, and we will be happy to assist.
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