Most nonprofits that are incorporated under the nonprofit law of a particular state think they are completely tax exempt (from paying any taxes whatsoever), however this is not always the case. These organizations are still subject to employment taxes, business income tax (that is unrelated), excise taxes, and local tax.
Form 990, Return of Organization Exempt from Income Tax and Form 990-EZ
All charity groups must file the following forms: Form 990-N (Short Form Return of Organization Exempt from Income Tax), Form 990 (Return of Organization Exempt from Income Tax), Electronic Notice for Tax Exempt Organizations not Required to File Form 990 (or 990-EZ), and 990-EZ.
The submitted forms will depend solely on the activities of the nonprofit organizations. For organizations with receipts above $25,000 but below $100,000 then they must fill out a Form 990-EZ. This also holds true for nonprofits with assets below $250,000. If the receipts are more than $100,000 then the organization needs a Form 990, while under $25,000 would be a Form 990-N. These are the forms that apply to organizations under 501(c)(3) laws and regulations.
The Form 990 and 990-EZ are both due on the 15th day five months after the annual accounting period for the organization has ended. If the due date cannot be met, then the organization must file for an extension, which requires a Form 8868 (Application for Extension of Time to File an Exempt Organization form). If this is submitted before the due date (for example, if the organization knows the records are not in order), then this will be okay. If not, then the organization must explain the reasoning for its tardiness.
Forms 990 and 990-EZ Filing Exceptions
In some cases a nonprofit organization may be exempted from filing the Form 990/990-EZ. Churches, affiliated church groups, and certain organizations working with governmental departments all can file as a group together. Also, nonprofits who generate less than $25,000 can also bypass filing these forms.
Even if the IRS asks for a Form 990, you are not required to submit any returns if the organization fits within these exceptions. Nonetheless, a group can choose to file the 990 and 990-EZ in which case you need to submit the Form 990-N in its entirety.
Special Requirements for Supporting Groups
Since August 17, 2006 supporting nonprofit organizations must complete a Form 990 (or 990-EZ) even if they receive less than $25,000 as pursuant to the 509(a)(3) code.
Affiliated religious organizations are not required to fill out a Form 990 / 900-EZ even with less than $5,000, but they are still required to complete a 990-N. Additionally, other requirements exist in order to determine what type of supporting organizations they operate as.
In order to determine what type of organization a group is, the forms require a simple choice of Type 1,2, and 3. They can also try to prove they are not being controlled by an unqualified individual. However, for those who find this process difficult, it is advised that you seek out a nonprofit attorney who can help you with the Schedule A of the 990/990-EZ. This will allow the nonprofit to file under the correct type.
Form 990 – Schedules A and B
Any nonprofit organization filing a Form 990 / 990-EZ is also required to fill out a Schedule A, which details the salaries and expenses for directors and other employees of the nonprofit group. Expenditures and activities that the nonprofit undertakes is also included in this form as well.
Running a private school or university requires special attention to the Schedule A, but every detailed instruction is included in the form itself. A nonprofit organization with contributions should also fill out a Schedule B. Guidelines for Meeting the Requirements for Schedule B is a guide that will help you to complete this process.
Reporting Transactions with Excess Benefit
Upon looking at the Section 4958 of the 501(c)(3) code, a nonprofit will see whether they have an unreasonable advantage / benefit for a specific party. A nonprofit group will be expected to notify authorities of this through the 990 and 990-EZ.
Filing Electronic Notice for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ, Form 990-N
If a nonprofit organization’s receipts do not amount to $25,000 then instead of submitting a Form 990/990-EZ they will complete a Form 990-N, the Electronic Notice for Tax Exempt Organizations not Required to File Form 990 or 990-EZ. For people who would like reference on this, please view Section 6033(i).
Filing the Form 990-N must be done on the 15th day of the 5th month after a nonprofit organization’s tax period is over. Therefore, a nonprofit should submit the form on the 15th of May if their tax period ends on December 31st.
Filing for the 990-N form requires a bit of information. You must name your organization, note any alternative names, offer the address of the office, web address, the TIN of the corporation, list officers and their personal information, tax period, and proof that the nonprofit generates less than $25,000 annually. Alternatively, an organization can terminate through the 990-N Form as well.
Requirements for Electronic Filing
If a nonprofit organization has assets worth $10 million or more, then they are required to file with a Form 990 electronically. Any organization filing up to 250 tax returns per year must also go through the same process, which includes employment, income, and excise taxes as well as the 1099 and W-2 forms.
Filing Penalties and Revocation of Tax-Exemption
Penalties for not filing the Form 990/990-EZ are stern, but fair. Every day a nonprofit fails to submit their documents, the IRS will charge an extra $25. However, this is not allowed to exceed 5% of total income (or more than $10,000). Nonprofits with an excess of $1 million will have to pay a $100 penalty until the $50,000 threshold. Additional penalties might also apply as well depending on the situation.
After three years of failing to file the proper forms and papers, the tax-exemption will be revoked by the IRS. The only way to reverse this decision is to submit a Form 1023, which is a request for reinstatement. A user fee must be added, but the hardest part is to prove that there was a valid reason for not filing the returns. Check the Section 6033(j) for additional information.
The Form 8734, Advance Ruling Period for Tax Exempt Status
A newly founded nonprofit organization can file for an advanced ruling of charity status in order to get the tax exemption. Usually this is done when a charity has not existed long enough to prove that it deserves to be one. The ruling period lasts for up to 5 tax years, but a Form 8734 must be filed 90 days after the period is over. If this information is not completed then the organization will be considered private.
Form 990-T – Tax-Exempt Organization Business Income Tax Return
The 990-T, or Exempt Organization Business Income Tax Return, is necessary for organizations that are not required by law to file the 990 and 990-EZ. This is mainly applicable for organizations with $1,000 or more from unrelated business revenue. They are taxable if they are unrelated to the nonprofit’s goals, consistently scheduled, or comprise a trade or business.
Some organizations are required to pay a tax every quarter. For more than $500 an organization should file every single quarter. The Estimated Tax on Unrelated Business Taxable Income for Tax Exempt Organizations (or Form 990-W) will show you the addition payment requirements that are due.
Exceptions to the Rules for Tax-Exempt Organizations
An organization can also earn extra revenue that are unrelated to the nonprofit’s goals not part of the income, and also unrelated to business income tax. The exceptions include income if only volunteers do this, if they were done to benefit certain members of the nonprofit, students getting an education, patients or employees, or tradeshows.
These earnings are considered “passive” and are therefore not calculated as unrelated business activity. This would include assets that provide rent payments on a monthly basis, or stock dividends etc.
However, if real estate was purchased with loans, then the profit is considered debt-financed and therefore becomes a unrelated business income tax purchase.
Nonprofit Employment Tax Returns
Nonprofit organizations must pay employees even if they are not working for a profit. The organization must still pay an employment tax with a federal income tax withholding. Additionally, employers are forced to pay Social security, Medicare taxes among other things. An employee who earns $100 or more must withhold federal income tax. The W-4 Form will help organizations determine how much needs to be withheld. The employment returns require the Form 941 (Employer’s Quarterly Federal Tax Return), which are subject to late penalties as well.
Organizations that hire independent contractors do not have to withhold their income tax, but other requirements and obligations must be met. Make sure to check before coming to any conclusions.
Churches and Employment Taxes
Employment taxes for churches and affiliated groups are exempt even though they may still be required to withhold income taxes. They are also exempt from FICA in some cases and ministers and religious leaders are tax exempt as well. Publication 517 has additional details on taxing religious leaders and their workers.