Tax Rules: Nonprofits Ignore Them at Their Peril
Navigating the complexities of tax laws is not easy and so working with an accountant can be a good first step. Here are some basics so that your organization can avoid common pitfalls that carry serious consequences if not addressed.
While not everyone at your nonprofit needs to become an expert on charitable contribution tax rules, it is helpful if some key people on your staff—particularly those involved in fundraising efforts—understand the basic charitable deduction rules.
IRS rules makes some types of donations easier or more advantageous than others. So, knowing such information encourages people to make certain types of donations, while discouraging other types. Your fundraising strategies always should take the tax effect of a donation into consideration. You can use fundraising letters, emails and other communications to explain to potential donors the tax benefits of particular types of donations. For instance, your fundraising letter could advise donors of the potential tax benefits of donating publicly traded stock that has gone up in value since purchased.
To make sure that your donors understand current IRS requirements for donations, it can be beneficial to post basic information on your website.
For example, if your nonprofit provided any goods or services in exchange for a donation--a tote bag, or a meal or a fruit basket for winning a silent auction--you may want to remind that their tax deduction is limited to the excess of the contribution over the fair market value of any items received in exchange for the donation. In thank-you letters, it's a good idea to include the following reminder for donors: Please keep this written acknowledgment of your donation for your tax records.
Of course, there's no substitute for professional advice because there are a range of tax-related issues including applying for and maintaining tax-exempt status, routine reporting requirements and political lobbying activities.
All tax-exempt organizations must file certain reports with federal, state and local authorities. Restricted contribution amounts are reported on a nonprofit's tax return. Nonprofits are required to itemize expenses across general and administrative, fundraising and program areas. These are called functional expenses and the IRS requires they be reported. Failure to file the right forms, depending on the type and size of the organization, can lead to severe penalties.
It's important to retain tax-exempt status so that contributions made by donors continue to be tax deductible. To keep tax-exempt status, various reporting documents must be filed on an annual basis—the IRS is vigilant in observing these rules. Indeed, in 2011, about 500,000 organizations had their tax-exempt status automatically revoked for failing to file required reporting documents for three years in a row.
And while nonprofits are exempt from income taxes, they're still required to pay payroll taxes. Typically, payroll taxes are withheld from employee paychecks and deposited by the organization with the proper federal, state or local taxing authority.
Also, the organization may need to collect and remit sales tax if taxable goods and services are sold. Sales tax filing responsibilities differ by state and can be complex.
Working with an accountant is important to ensure that the necessary paperwork is being filed for your organization. Don't assume that just because you're a nonprofit, you can safely ignore tax rules.