Compliance requirements for a nonprofit organization are strict, but necessary in order to maintain exemption status. The special advantages that come with this status are subject to the internal revenue rules.
Activities That Jeopardize Exemption Status
All employees, officers, and directors of a nonprofit 501(c)(3) organization must follow certain guidelines and regulations in order to maintain their tax exempt status.
Charities that are public cannot participate in all community activities or else they may lose their exempt status. Here are some additional rules and guidelines for nonprofit organizations in order to maintain their status (be sure to contact a nonprofit attorney if you have questions about compliance):
Private benefits for public charities must be limited so that the public community is served rather than private interests. Any accumulation of benefits in private hands could cause a nonprofit to relinquish claims to tax exempt status.
Additionally, while private interests should not benefit from a nonprofit, neither should an individual (such as the director or officer). A director or officer cannot be paid an unreasonable salary under these guidelines. Excessive salaries for those with influence over the organization are also subject to scrutiny.
Intervening in Political Campaigns
As well as the stipulations about private and individual benefits, nonprofit groups are subject to political campaign scrutiny. Any 501(c)(3) is not allowed to participate in political funding for either party. If evidence suggests that a nonprofit is partaking in these practices, then the exempt status may be removed.
However, some activities are allowed in the political arena. Voter education is allowed, but must be done in a non-partisan way. Additionally, encouragement for the election process is allowed under existing regulations so long as it is not partisan in nature.
While all of these regulations are in place for the nonprofit organization, that does not mean that a private leader cannot freely exercise the right to free speech. Leaders are not allowed to do so at charity events or publications, but are able to do so at any other time as long as they are represented as their own.
Participating in Legislative Activities
Lobbying is another issue that public charities must refrain from entering. Any 501(c)(3) organization that is caught lobbying members of a legislative body can lose their tax exempt status. A IRS substantial part test is used in order to determine if a nonprofit organization has actually broken these rules, but each case is evaluated differently.
A nonprofit organization can fill out a form 5768 in order to request an expenditure test, which will grant tax exempt status if the legislative activities do not break any IRS rules and regulations.
Maintaining Good Records
Good accounting practices are also necessary for charities to keep their tax exempt status. The 990 Form must include receipts for revenue and expenditure.
However, if the organization does not maintain good records, then it may have trouble showing whether it qualifies for tax exemption status. Without being able to show why tax exemption is necessary, the organization will most likely lose the status.
For efficiency reasons it is also good for charities to keep good records. Through this they can determine how well the organization is doing and what needs to be fixed in order to make it better. This is one of the only ways to identify mistakes and achieve goals.
Monitor The Budget
Monitoring the budget requires good records so that nonprofits can recognize whether revenue and expenditures fall in the charity budget guidelines.
Preparing Financial Statements
Financial records are necessary for nonprofit organizations to create annual financial statements. Contributors, bankers, creditors and other funding groups will need to see annual financial statements if they will be a part of the nonprofit organization. Nonetheless, some states require charities to make these statements available for public scrutiny.
Tax Returns and Annual Information
Expenses, credits, and income must all be shown clearly on the 990 Form along with all other tax documents and information. The IRS requires the proper records to be filed annually to ensure that nonprofits are meeting their requirements. Doing this will make an organization have an easier time dealing with inspections and audits.
Identifying the Sources of Receipts
Receipts are the most important aspects of any annual report. Organization problems sometimes occur because charities receive money from many donors and other sources. Taxable and non-taxable income should be separated by using the sources of the receipts. If these are lost, then the annual financial report could become skewed.
Substantiate Revenues, Expenses and Deductions for Unrelated Income Tax Purposes
Unrelated business income is taxable so it is important to keep track of all records. In order to fill out business income tax returns, this information must be accurate. Every Public 501(c)(3) is subject to these regulations.
Individual grants are another way that public charities distribute funds, but they must also be recorded well. These records are supposed to indicate whether or not the charity is fulfilling the stated goals. Personal information, such as names, addresses, relationship etc., must be included as well.
Compliance with Racial Nondiscrimination Requirements for Private School
In order to provide funds for a private school, they must first demonstrate their racial nondiscrimination policies that must be publicly stated through media or newspapers annually. Otherwise, the nonprofit can’t support the institution.