Nonprofit Taxes: How To Avoid IRS Scrutiny

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Organizations that participate in activities that benefit both private and public interested without chasing after monetary or commercial profit are considered to be a nonprofit organization. In order for an organization to be considered a nonprofit entity, they have to meet specific rules set by the IRS. 

Based on IRS subsection 501(c), nonprofit organizations don’t have to worry about paying taxes. If you’re not sure if your company qualifies as a nonprofit organization and you’re worried about nonprofit taxes, we’ve created a complete guide to help you understand. Keep reading to learn more about how nonprofit organizations are affected by a tax-exempt status!

Tax Law nonprofit taxes

Do Nonprofits File Tax Returns? 

There are three tests that your nonprofit has to meet in order to be considered a 501(c)(3) tax-exempt organization. These tests are:

Asset Test

A nonprofit organization’s charter must state that it bars individuals from receiving income or assets, expect fair payment for any services that they provide. In addition, the nonprofit organization has to explicitly mention that it won’t be used for the benefit or gain of any of its associates, employees, supporters, founders, or relatives. 

Political Test

A nonprofit company interested in obtaining a 501(c)(3) has to state in its organizing papers that they won’t participate in any type of political campaign. In addition, they must list that they won’t make any expenditures for any type of political purpose. While there are 501(c) companies that can participate in these types of activities, organizations seeking a 501(c)(3) aren’t allowed to. 

Organizational Test

Any nonprofit organization seeking a 501(c)(3) status has to have a lawful purpose in one of the following categories: 

  • Preventing child cruelty
  • Preventing animal cruelty
  • Literary
  • Charitable
  • Educational
  • Religious
  • Scientific
  • Testing for public safety
  • Fostering international or national amateur sports

The majority of nonprofit companies are required by law to file annual tax returns. While the majority of nonprofit companies are tax-exempt don’t have federal taxes (this is what being tax-empty means), these companies still have to file an informational return with the IRS. This is done by using a Form 990, which is the informational reporting return the IRS requires.  

What’s the IRS Form 990?

The IRS Form 990 is the form that the IRS states tax-exempt companies have to file every year.  Form 990 provides both the public and the IRS to take a look into the operations of the nonprofit organization, as well as better insight into the programs, finances, and the mission of the nonprofit company. 

Depending on the total amount a company is going to file for its gross receipts and the year they’re filing, there are different types of Form 990s that a nonprofit organization will have to use.  

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Does a Tax Exempt Nonprofit Have to Worry About Paying Any Taxes? 

If your organization has received a tax-exempt status, it doesn’t mean that you’re exempt from paying all taxes. A tax-exempt status means that the organization is exempt from paying federal income taxes. This exemption only applies to any income received from the activities that are related to your company’s purposes that were granted the federal tax exemption

If you or your organization have generated any income that came from an activity that’s related to your nonprofit purpose still is subject to income taxes. While exceptions apply, nonprofits that are eligible for tax-exemption can also use this to be expent from paying state income taxes. 

A nonprofit organization that’s exempt from paying federal income taxes still have to pay the following taxes:

  • Personal property
  • State unemployment
  • Federal payroll
  • Sales and use
  • Real estate 

Now that you have a better understanding of what being a nonprofit that’s tax-exempt means, let’s take a look to see what type of form your nonprofit has to file. 

What Type of Form 990 Does Your Business File?

Any organization that’s 501(c)(3) has to file a Form 990 (although state institutions and churches have their own exceptions). Here’s more insight into which type of Form 990 your nonprofit organization will have to file: 

  • Private foundations have to file a Form 990-PF
  • Small nonprofits that have gross receipts of less than $50,000 have to file a Form 990-N (also referred to as an e-Postcard)
  • Large nonprofits that have gross receipts of more than $50,000 have to file a Form 990-EZ

Form 990-N

Small nonprofit companies file the Form 990-N, which is the most broken-down version of tax reporting for organizations that are exempt from filing taxes. If your company has receipts of $50,000 or less, your company can file a Form 990-N, which is an electronic notice (e-Postcard). This will file your organization under tax-exempt organizations that are not required to file a Form 990-EZ or Form 990. 

A Form 990-N is due by the 15th day of the fifth month after the end of your company’s tax year. You can file this form online on the e-Postcard website. 

Form 990-EZ

If your nonprofit organization has receipts of less than $200,00 or own any assets of less than $500,000, your nonprofit company can file a Form 990-EZ. A nonprofit company the files their changes, expenses, and their revenues in fund balances in part one, the simplified balance in part 2, the statement of program accomplishments in part 3, and a list of trustees, directors, officers, and other key employees in part 4 of the Form 990-EZ. 

In part 5, there’s a miscellaneous questions section that has to be filled out by all organizations that are using the form. The questions in part 6 if the nonprofit organization is a 501(c)(3) organization (which means that they’re tax-exempt). Before retuning Form 990-EZ, there must be an authorized individual that has to sign the form. 

Form 990

Any size nonprofit organization can file a Form 990, but companies that have gross receipts of more than $200,000 or own any assets that have a value of over $500,000 have to file a Form 990. 

On the first page of the Form 990, the majority of the information that’s included is also found on the Form 990-EZ. However, the full Form 990 is different than the short form, as the 990 requires the attachment of several documents that provide in-depth details about the nonprofit organization that’s filing. Just like other types of nonprofit tax returns, Form 990 can be viewed by the public. 

Not Required to File

Some types of nonprofit organizations don’t have to file any type of return with the IRS. Specific religious organizations, government organizations, political organizations, and black lung benefits trusts don’t have to file any type of Form 990 with the IRS, no matter the receipts or assets they have. 

Are Any Nonprofits Exempt From Filing an IRS Form 990? 

Not all nonprofit organizations are required to file an annual return. The following organizations don’t have to worry about filing a Form 990: 

  • State institutions 
  • Government corporations
  • Subsidiaries of other nonprofit organizations (this type of organization will be covered under a group return that the parent nonprofit files) 
  • Religious schools
  • Faith-based organizations
  • Missions or missionary organizations

To determine whether your organization is exempt from an annual tax return, it’s essential to check with the IRS to determine what your organizations’ needs are. 

What Happens If Your Business Doesn’t File an IRS Form 990? 

If your nonprofit organization fails to file a Form 990 for three years in a row, the IRS will revoke your status of being tax-exempt. At this time, there isn’t an appeal process of automatic revocations that were caused by failure to file the appropriate Form 990 for three years in a row. As an end result, this would force your nonprofit organization to have to start paying an income tax. 

When your organization fails to file a Form 990 on time, there are also penalties that you have to worry about as a consequence for filing late. In addition, your company will also have to worry about income tax liability. 

Worried that your organization won’t be able to file a Form 990 on time? You can use Form 8868 to request a six-month extension to file your tax returns without having to worry about penalties for filing late. However, the due date for the Form 990-N can’t be extended, as there isn’t a penalty if your company ends up submitting the forms late. 

Nonprofit Taxes: Avoid IRS Scrutiny 

Understanding nonprofit taxes and if your organization is exempt can be tricky, especially if you don’t have a background in handling taxes. Finding the right advisor to avoid IRS scrutiny doesn’t have to be challenging and can help take the stress of filing off of your shoulders. 

If you’re looking to have your nonprofit taxes handled by tax professionals, look no further. Click here to start a free case evaluation to help resolve your IRS tax headache today!

Managing Partner of Silver Tax Group, author of the book “Stop the IRS”. Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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