Nonprofits are organizations that operate for the collective public and private interest without aiming to generate profits for the founders. Unlike businesses, nonprofit organizations are exempt from federal income taxes under subsection 501(c)(3) of the Internal Revenue Service (IRS) tax code. Tax-exempt enables nonprofits to save thousands of dollars to facilitate their operations effectively. However, to become exempt from federal taxes, nonprofits must meet certain criteria, including operating exclusively for charitable, religious, educational purposes, and more. In addition, every income generated should be turned over to the organizations or individuals legally recognized as legitimate charities.
Nonprofits must apply for tax-exempt status with the IRS and be approved to become tax-exempt. In other words, merely creating and incorporating a nonprofit organization in your state does not qualify it as a tax-exempt organization but establishes it as a legal business entity.
How Can a Nonprofit Be Tax Exempt?
Many people think setting up a nonprofit organization will automatically make it tax-exempt. But unfortunately, that is not the case. For your nonprofit organization to attain tax-exempt status, there are some processes you must undergo. And it would help every nonprofit leader know the right procedures to follow when filing for tax-exempt status. Below are the guideline for obtaining tax-exempt status for your nonprofit.
Start with incorporating your nonprofit within your state, and get your Article of Incorporation handy. When filing for tax-exempt, the IRS would request your Article of Incorporation.
Apply for Your EIN
Having gotten your Article of Incorporation, the next you would do is to get your Employer Identification Number, irrespective of whether you have employees. To obtain your EIN, you should file Form SS-4 with IRS.
Detail Your Nonprofit Mission
You should provide an in-depth explanation of your nonprofit’s purpose in your Article of Incorporation. In other words, the mission your nonprofit is created to serve must be convincing enough to the IRS when considering your application for tax-exempt status.
File Form 1023 with IRS
You must electronically file Form 1023 to recognize exemption from federal income tax. However, not filing your application properly may lead to rejection. In other words, submitting the application does not guarantee exemption will be recognized. Your bylaw and Article of Incorporation are required when filing Form 1023.
What is a 990 Form for Nonprofit?
Every tax-exempt organization must file an annual information return with the IRS. Form 990 is the major tool used by the IRS to gather information about tax-exempt organizations and serves as a tool for educating organizations, including nonprofits, about tax law requirements to promote compliance. In addition, nonprofit organizations also utilize Form 990 to share information with the public about their mission and programs. Plus, many states depend on Form 990 to carry out regulatory oversight to checkmate organization organizations claiming exemption from state income tax.
Nonprofits file Form 990 to report information about their finances, leadership, and other activities. IRS verifies this information to ascertain whether nonprofits should keep their tax-exempt status. Primarily, Form 990 gives the IRS a snapshot of nonprofits’ finances and sums up the nonprofit’s mission, and indicates who are the board of directors.
Most importantly, since the government makes Form 990 publicly available, it enables the public to know whether the organization is trustworthy, thereby making it easy for nonprofits to access a line of credit when it becomes needful. However, if a nonprofit fails to file Form 990 in three consecutive years, the IRS automatically revokes its tax-exempt status.
Federal Tax Filing Requirments for Nonprofits Organizations
Typically, nonprofit organizations must file annual returns with the IRS. However, the IRS may assess penalties if a nonprofit fails to file as required or files late. Plus, if a nonprofit does not file an information return as stipulated by the IRS tax code, it automatically loses its tax-exempt status.
Any nonprofit organization that typically has $50,000 or more in gross income required to file an exempt information return must either file Form 990, Form 990-EZ or Short Form Return of Organization Exempt from Income Tax.
The return is due on the 15th day of the 5th month after the end of the nonprofit’s fiscal year. Still, the due date may be extended for six months, but an organization can only be allowed only an extension of six months for a tax year.
In addition, small nonprofit organizations-those whose gross receipts are normally below the threshold- are not required to file an annual return but may be required to file an annual electronic notice using e-Postcard.
What is the Due Date for Nonprofit Tax Returns?
According to IRS, the due date for nonprofits’ tax returns is the 15th day of the 5th month after the end of your organization’s accounting period. For example, a nonprofit calendar year taxpayer is expected to file Form 990 or 990-EZ by May 15th. Although, the due date may be extended for six months without showing the cause. Nonprofits can also extend the due by filing Form 8868 before the due date; however, organizations are only allowed an extension of 6 months for a return for a tax year.
Because nonprofits commonly operate for charitable and other beneficial purposes, the income they generate is exempt from tax under the IRS tax code. However, when nonprofits engage in economic activities that are considered to be unrelated to their exempt purposes, it may result in taxable income. However, it’s worthwhile for nonprofits to always have a cash backup in order to cater to their numerous programs especially when cash flow is temporarily down.
At Financing Solutions, a leading provider of business loans for nonprofits in the form of a 501c3/not-for-profit line of credit. If you are looking for a loan for your nonprofit you should consider our line of credit product.