Nonprofits: Understanding the Tax Issues
It's often assumed that nonprofits have no tax obligations at all, but that's not true. Nonprofits do get a lot of tax breaks, but managers of nonprofits still need to be well-versed in the tax code to make sure they're in compliance.
Although most tax-exempt nonprofit organizations don't pay federal taxes, they have to file an informational return with the IRS. The annual reporting return is called a Form 990. It allows the IRS and the general public to evaluate a nonprofit's operations, including information on the nonprofit's mission, programs and finances. All 501(c)(3) private foundations also need to file a 990.
Nonprofits aren't exempt from all taxes. Those that have employees pay payroll and withholding taxes. Though there may be some quirks about specific tax obligations at the state and local levels, the majority of employment-related taxes apply with equal effect to all employers.
Whether nonprofits have to pay sales tax on purchases and charge sales tax when they sell things depends on state and local tax rules — and, as you can imagine, they vary widely and have a lot of tricky parts. It's a good idea to research every jurisdiction where people buy things for or from an organization to get answers. The answer can vary, depending on the type of organization, the kind of goods bought or sold, and whether the transaction is for fundraising or other purposes. There's no substitute for local knowledge about sales taxes.
How about admission taxes? Tickets to nonprofit events are often exempt from taxes, but not always. Checking with the tax office of the place where the event is to be held is often the only way to find out.
There's no general rule that applies in every state and city. In some localities, all nonprofit income is exempt, while others consider how the income was earned or what it's for. Sometimes the state or local rules parallel the federal tax statutes; sometimes they are completely different.
So what can nonprofits be relatively sure of? That they file 990 series forms with the IRS. And even then, it's good to be aware that there are different 990 forms — 990-EZ and 990-N. Larger nonprofits with gross receipts of more than $50,000 file Form 990 or 990-EZ. Smaller nonprofits with gross receipts of less than $50,000 file Form 990-N. Private foundations file Form 990-PF.
The nonprofits that are exempt from filing IRS Form 990s are mostly faith-based organizations, including religious schools, missions or missionary groups; subsidiaries of other nonprofits —those that may be covered under a group return filed by the parent organization; many government corporations; and state institutions that provide essential services.
It's a good idea to check with the IRS to determine your organization’s filings requirements.
If an organization fails to file Form 990 three years in a row, the IRS will automatically revoke its tax-exempt status. Many nonprofits across the country have lost their tax-exempt status for this reason. Don't let that happen to your nonprofit.
If you're confused about your status and want to make sure you're meeting your IRS and state and local obligations, give us a call. We'd be happy to discuss your situation.