A Brief Overview of Tax Obligations and Filing Requirements of Nonprofit Organizations

Filing requirements for tax-exempt organizations can be a maze of bureaucracy. Though many tax-filing requirements can be similar for the different types of tax-exempt organizations, there are key distinctions 501(c) organizations should be aware of. Fortunately there are tax preparation services that can help in this matter.

Though before we go any further, it is essential to understand what “nonprofit” means. Though the phrase gives many the belief that nonprofit organizations do not pay taxes, this is not the case. For instance, nonprofits are required to pay employee taxes (e.g., Medicare, Social Security) just like any for-profit organization. Even then, the tax exemptions organizations do receive come with strict rules, and organizations still have filing requirements to prove to the IRS funds were used in accordance with the tax code.

Below is a very brief overview of tax-exempt organizations. Apex Law Group, a firm with experienced tax-exempt attorneys on its team, can provide a more detailed explanation of the below.

Tax Exemptions of Nonprofits

Under subsection 501(c) of the Tax Code, many nonprofits are exempt from federal income taxes. They’re also exempt from paying several state taxes, such as property tax and sales tax.

501(c) of the tax code allows for dozens of types of tax-exempt organizations. The most common tax designation for charitable nonprofits is 501(c)(3) because It exempts the organization from income tax and allows their donors to take tax deductions from the donations. To become a 501(c)(3), an organization must:

  1. Operate exclusively for any of the following:
  • Charitable
  • Scientific
  • Educational
  • Religious
  • Preventing animal cruelty or child abuse
  • Testing for public safety
  • Literary
  • Fostering national or international amateur sports competition (only if the activities don’t involve providing athletic equipment and facilities)
  1. Be organized as a corporation, foundation, or state nonprofit
  2. No earnings must may inureto any private shareholder or individual.

It is important to note the type of tax-exempt organization people recognize are public charities. Public charities must be publicly supported up to qualify for tax exemption. One-third of their income must come from public sources (i.e., contributions from the general public or government units).

Tax Filing Obligations of Nonprofits

Most tax-exempt charitable nonprofits must file an annual information return with the IRS through Form 990. The organization’s board must review the form before submitting it to make sure all the details are accurate.

Very few organizations are exempted from filing a federal annual information return, including:

  • Church-affiliated organizations
  • Organizations with annual gross receipts below $50,000; however, they are required to file a yearly e-postcard or Form 990-N
  • Organizations included in a group return

Apart from these federal tax obligations, nonprofits may also have filing requirements in the state where they’re incorporated. State filing requirements vary per state and are too numerous to cover in this blog. Most states do require nonprofits to periodically verify their basic contact information, and disclose financial information to retain nonprofit status. Nonprofits are also required to pay employee taxes (e.g., Medicare, Social Security) just like any for-profit organization. Nonprofits have to take care when doing their accounting and payroll duties.

Keep in mind that nonprofits organized under state law aren’t automatically exempt from federal tax obligations. They must apply for recognition as a tax-exempt organization by obtaining a ruling from the IRS. The application process is time-consuming and intricate, requiring a detailed disclosure of funds, a clear business plan for carrying out tax-exempt activities, and a properly organized entity. Hiring a tax-exempt lawyer makes the process easier and faster.

For questions about the tax exemptions and obligations of nonprofits, Apex Law can help. We assist local entrepreneurs and individuals in building, maintaining, and guiding their for-profit and nonprofit businesses from formation to success.

The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact us today to schedule a free consultation.

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