tax obligations

Tax Obligations and Filing Requirements of Nonprofit Organizations

Many are confused by nonprofit and tax-exempt corporations. They can be similar to some extent, but they have many differences in tax obligations. If you’re thinking of starting a social enterprise, it’s essential to understand what “not-for-profit” means.

Many believe that nonprofit organizations do not pay taxes. This isn’t really the case. Nonprofits like churches and private foundations do enjoy some tax exemptions. However, they still have obligations and filing requirements to fulfill with the IRS.

Apex Law, a firm with experienced tax-exempt attorneys on its team, explains the tax exemptions and responsibilities of nonprofit corporations.

Tax Exemptions of Nonprofits

Under subsection 501(c) of the IRS 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.

Nonprofits must meet the following criteria to be tax-exempt:

1. Operate exclusively for any of the following categories:

  • 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)

2. Be organized as a corporation, unincorporated association, or trust

3. Turn over entire income to individuals or organizations recognized as legitimate, legal charities

Tax Exemption Criteria for Charitable Nonprofits

Public charities must be publicly supported to qualify for tax exemption. A third of their income must come from public sources (i.e., contributions from the general public or government units).

The most common tax designation for charitable nonprofits is 501(c)(3). ; It exempts them from income tax and allows their donors to take tax deductions from the donations. Note that charitable nonprofits must apply for their 501(c)(3) status with the IRS.

Tax Obligations of Nonprofits

Most tax-exempt charitable nonprofits must file an annual information return with the IRS. This is filed by the end of the tax year using Form 990, a public document. 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 an annual information return. Here are some of them:

  • Nonprofits that have never been recognized by the IRS as tax-exempt
  • 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, although most require nonprofits to verify their basic contact information periodically.

Nonprofits are also required to pay employee taxes (e.g., Medicare, Social Security) just like any for-profit organization.

Keep in mind that nonprofits aren’t automatically exempt from tax obligations. They must apply for recognition of exemption to obtain a ruling from the IRS. The application process is time-consuming and intricate, requiring various documents that must be filled out carefully and accurately. Hiring a tax-exempt lawyer will make the process easier and faster.

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

Contact us today to schedule a free consultation.

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