Filing Taxes For Nonprofit Organizations

Nonprofit organizations are important to our society and our economy. They promote social good and progress through their work, either through fundraising, identifying public needs, or raising awareness about a social or medical issue. While operating a nonprofit consumes resources, our tax code doesn’t consider certain elements of this income taxable. Most nonprofits are tax exempt. It is perhaps the strongest benefit for charitable and volunteer organizations in the United States, and it is a distinction used by charitable hospitals, public and private schools, religious institutions, and other organizations. But nonprofit and tax-exempt status can be a bit of a gray area, and while nonprofit groups do get extraordinary benefits and a later nonprofit federal filing due date than their for-profit brethren, they are not completely tax exempt.

This blog will take a closer look at how the tax code defines a nonprofit group and some of the prolific facts and fallacies about how this status relates to paying taxes.

Who Is Considered a Nonprofit and What Does That Mean?

The actual definition of a nonprofit is difficult to pinpoint since the term refers to a business model and not a kind of organization. A “nonprofit” can be anything from a church to an animal rescue group. Regardless of the cause they support or who they administer to, there are a few rules they have to follow:

It must be separate from the government.
It has to be a self-governing body.
It must not distribute profits or use them for any purpose other than for the benefit of the organization.

There are other legal requirements, but these are three main attributes of any organization that identifies as nonprofit. Tax exemption is a benefit of being a nonprofit, and most associations qualify under one of 25 subsections of Section 501 (c) of the Internal Revenue Code.

Do Tax-Exempt, Nonprofit Organizations Have to File Tax Returns?

Any entity that receives money must report their income to the U.S. Government, and tax-exempt, nonprofit organizations are no different. While they do not pay income taxes, they file a Form 990 annual reporting return. This return allows the IRS to review and evaluate a nonprofit’s operations, programs, and finances. It is a public document, and nonprofit organizations are required to keep all Form 990s available to view at their offices or on their websites. Any organization that fails to file a Form 990 on time risks losing its tax-exempt status.

Does Tax-Exempt Status Mean That an Organization Is Exempt From All Taxes?

It doesn’t. Tax-exempt status refers to federal corporate taxes, and most organizations are responsible for many other taxes:
Federal payroll taxes, including social security, medicare, and unemployment
State and local unemployment taxes
Real estate taxes
Personal property taxes
Sales and use taxes
Franchise taxes
Certain states may offer exemptions for their own income taxes, but organizations are expected to comply with strict guidelines to maintain state and federal tax exemption status. Nonprofit associations can earn more income than expenses. Some organizations are required to pay taxes on income that is unrelated to tax-exempt purposes, known as unrelated business income.

The Advantages of a Knowledgeable Nonprofit Accountant

For-profit businesses are more likely to hire an accountant because their companies are formed to make money. Since nonprofits are mission-focused and most resources are dedicated to that mission, their financial management is most often turned over to a volunteer with some accounting or financial planning experience.

As you can see, maintaining tax-exempt status is difficult at best. And while a volunteer may succeed at bookkeeping, reconciling bank accounts, or record keeping, a professional accountant that understands nonprofit organizations and their challenges is a considerable advantage.

Nonprofits need professional accounting help for a variety of reasons but two that are common to all stand out:

Your organization is struggling with filing annual 990 forms – Form 990 not only requires your organization to report sources of income, but it also has to justify how that income is used. Also, if your organization fails to file for three consecutive years, you will lose tax-exempt status.
You want more financial transparency – Donors want to know how that their money is being used responsibly and a professional accountant has the financial reporting knowledge to help you make sure spending and income records are accurate and available to anyone that wants to review them.

Rubino understands the needs of nonprofit groups and has many CPAs who specialize in nonprofit tax services. We assist nonprofit groups in developing their financial footing and increasing their organization’s value to have a solid foundation to carry out the vital work they do.