Tax Compliance Issues for 501(c)(3) Organizations
Whether you’ve just started a 501(c)(3) organization, recently submitted your organization’s first Form 990, or are the executive director, it’s important not to lose sight of your obligations under federal and state tax laws. From annual filing and reporting requirements to taxes on business income and payroll compliance, here’s a quick look at what 501(c)(3) organizations need to know about tax compliance.
Annual Filing and Reporting Requirements: Form 990
Once you’ve applied for and received tax-exempt status under Section 501(c)(3), your organization is officially a nonprofit and is exempt from federal tax on income related to the organization’s mission. It also means your organization can receive tax-deductible contributions from donors.
The next step is to comply with annual filing and reporting requirements, specifically, Form 990, Return of Organization Exempt from Income Tax or another form in the 990 series if special conditions apply.
Generally, tax-exempt organizations are required to file annual returns. If an organization does not file a required return or files late, the IRS may assess penalties. In addition, if an organization does not file as required for three consecutive years, it automatically loses its tax-exempt status. If the IRS notifies the organization that it has not filed, and no return is submitted before the due date shown in the notification, monetary penalties can be assessed against the individuals responsible for the failure to file.
There are four different Forms 990; which form an organization must file generally depends on its characteristics and gross receipts. Forms 990-EZ may be used by organizations with gross receipts of less than $200,000 and with total assets of less than $500,000. Form 990 may be filed my most nonprofits regardless of size.
Organizations that normally have gross receipts of less than $50,000 may file an annual electronic notice on Form 990-N (e-Postcard). Private foundations must file Form 990-PF regardless of financial status.
Form 990 is submitted to the IRS four and a half months after the end of an organization’s fiscal year. For example, for nonprofits whose fiscal year ends on December 31st, the initial return due date is May 15th. If a due date falls on a Saturday, Sunday, or legal holiday, it is delayed until the next business day.
An automatic three-month extension is available for most types of Form 990. If the extension was not enough time, an additional three months may be requested from the IRS. However, no extensions are available for Form 990-N.
Unrelated Business Income Taxes (UBIT)
Unrelated business income is defined as income from a trade or business which is regularly carried on and not substantially related to the charitable, educational or other purpose that is the basis of the organization’s exemption.
While it may come as a surprise to some, nearly all tax-exempt organizations are required to pay taxes on unrelated business income, which might include proceeds from an annual holiday card sale or souvenirs related to an educational exhibit in support of the nonprofit’s mission.
If the IRS determines that a nonprofit is significantly underreporting income from unrelated business activities, it may lose its tax-exempt status.
Organizations must file Form 990-T, Exempt Organization Business Income Tax Return, if the organization has gross income of $1,000 or more from a regularly conducted unrelated business.
Employment and Payroll Compliance
Similar to for-profit companies, nonprofit organizations must comply with both federal and state payroll reporting requirements. Federal income tax withholding, Social Security taxes, and Medicare taxes must be deposited through the Electronic Federal Tax Payment System (“EFTPS”), and the organization must file Form 941 on a quarterly basis. Nonprofits are also required to report reimbursements to employees for out-of-pocket expenses as wages; however, nonprofits that create an accountable reimbursement plan or ARP that meets IRS guidelines are able to avoid these reporting requirements.
These are just a few of the tax-compliance issues facing nonprofit organizations. If you have any questions, would like more information, or need help setting up an ARP that meets IRS requirements, please call our office.