A step by step guide for non-profits on how to maintain tax exempt status.
February 2, 2024
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In Part 1 of this series, we covered How to Start a Nonprofit and learned how to successfully establish a nonprofit organization and gain exempt status. Now that your organization is up and running, let’s explore how to stay exempt, ongoing compliance, and significant events you should be aware of. This is not intended to cover every type of organization’s requirements, but the general guidelines will undoubtedly prepare you and help maintain your organization’s tax-exempt status. Be sure to partner with nonprofit focused tax, accounting, and legal advisors you can trust.
- For example, for 501(c)(3) organizations:
- Are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.
- Must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family or other designated individuals. No part of the net earnings may create a benefit to any individual.
- According to the IRS instructions for the Form 990: “The absence of appropriate policies and procedures can lead to opportunities for excess benefit transactions, inurement, operation for nonexempt purposes, or other activities inconsistent with exempt status. Whether a particular policy, procedure, or practice should be adopted by an organization depends on the organization’s size, type, and culture. Accordingly, it is important that each organization consider the governance policies and practices that are most appropriate for that organization in assuring sound operations and compliance with tax law.”
- While you have the first five years as a sort of runway to take off, the factors in the test should be projected and analyzed during the first five years to make sure you will meet and continue to meet the test. If you fail to pass this test it could result in the organization becoming a Private Foundation.
- To meet the test, you want to maintain and continually increase the total number of donors who give to your organization. If you only have a handful of individual donors giving to the organization, it could result in a failure to meet the public support test.
- the name of the organization
- the amount of any monetary contribution
- a description (but not the fair market value) of any contribution of property
- a statement that no goods or services were provided by the organization in return for the contribution if that was the case
- If the organization did provide goods or services in return for the contribution, a description and good faith estimate of the fair market value of the goods or services
*Contemporaneous means on or before the earlier of:
- the date on which the donor files the donor’s individual federal income
tax return for the year of the contribution; or
- the due date (including extensions) of such return
- Quid pro quo contributions are when a donor makes a contribution to a charity partly as a contribution and partly for goods or services. “For example, if a donor gives a charity $100 and receives a concert ticket valued at $40, the donor has made a quid pro quo contribution. In this example, the charitable contribution part of the payment is $60. Even though the deductible part of the payment is not more than $75, a disclosure statement must be provided by the organization to the donor because the donor’s payment (quid pro quo contribution) is more than $75. Failure to make the required disclosure may result in a penalty to the organization.” 4
Need Help with Your Non-Profit?
- If an organization’s tax-exempt status is automatically revoked, it is no longer exempt from federal income tax. Consequently, it may be required to file a Form 1120 or Form 1041, depending on the entity type.
- An automatically revoked organization is not eligible to receive tax-deductible contributions.
- January 31st is the deadline for filing the previous calendar year compensation related filings
- Payroll taxes could vary on when they’re due depending on the amount involved
- Be sure to inquire about your specific situation and circumstances to your nonprofit focus tax advisor to get up to speed on what may be required
- Once you build the house you cannot just walk away. It will still be standing until you dismantle it. You will need to take several steps to end your filing requirements to both federal and state authorities. Without these you could be on the hook for penalties and interest for not complying with the appropriate laws.
- If the organization is liquidated, dissolved, or terminated, you will need to file the annual federal return by the 15th day of the 5th month after liquidation, dissolution, or termination.
Nonprofit organizations are important catalysts in our society and can provide several benefits to the communities and groups they serve. Arguably, one of the most important assets of the organization is its tax-exempt status. Therefore, obtaining and maintaining this tax-exempt status is key to the nonprofit organization being successful and having longevity in the sector. To do that, an organization’s founder(s) should embrace the formation with a desire and willingness to learn and comply with the rules backed by trusted advisors that can help lead them to effective results. Here at Rubino, we have team members focused on nonprofit organizations ready to help you.