Tax Time: What Nonprofits Need to Know About Filing Taxes

Your focus is on making a difference, not deciphering tax codes. However, understanding tax obligations is crucial for maintaining your nonprofit’s financial health and legal status. This guide is here to demystify the tax filing process, providing easy-to-understand advice and valuable resources for your nonprofit organization.

Know Your Tax-Exempt Status

First and foremost, it’s essential to understand your organization’s tax-exempt status. Most social justice nonprofits operate under the 501(c)(3) designation, which exempts them from federal income tax. However, this status doesn’t automatically exempt you from all taxes. For example, you may still be liable for employment taxes and certain state or local taxes.

Resource: Visit the IRS website and review IRS Charities and Nonprofits for comprehensive information on tax-exempt status and obligations.

Filing the Right Form: 990 Series

Nonprofits are required to file an annual information return with the IRS. The form you use depends on your organization’s financial activity:

• Form 990-N (e-Postcard): For organizations with gross receipts less than or equal to $50,000.
• Form 990-EZ: For organizations with gross receipts less than $200,000 and total assets less than $500,000.
• Form 990: For organizations with gross receipts over $200,000 or total assets over $500,000.
• Filing accurately and on time is crucial to maintain your tax-exempt status.

Resource: The IRS provides instructions for the 990 Series Forms on their website.

Understanding Unrelated Business Income Tax (UBIT)

If your nonprofit earns income from activities unrelated to its exempt purpose, you might need to pay Unrelated Business Income Tax (UBIT). This means if you sell merchandise unrelated to your cause or rent out property on a regular basis, this income may be subject to UBIT.

Resource: IRS Publication 598, “Tax on Unrelated Business Income of Exempt Organizations,” offers guidance on UBIT.

State and Local Taxes

While federal taxes are really important, don’t overlook state and local tax obligations. These can include sales tax, property tax, and franchise taxes, depending on your location and activities.

Resource: Check with your state’s Department of Revenue or equivalent agency for specific state tax requirements.

Employment Taxes

If your nonprofit has employees, you’re responsible for employment taxes. This includes withholding federal income tax, Social Security, and Medicare taxes from employees’ wages, as well as paying the employer’s share of Social Security and Medicare.

Resource: The IRS Employment Taxes for Exempt Organizations page provides detailed information.

Record Keeping and Reporting

Accurate record keeping is vital for nonprofit tax filing. This includes maintaining records of all income and expenses, as well as documentation for donations received. These records will be crucial if your organization is ever audited by the IRS.

Resources: Fun with Financials offers a simple guide for Record Keeping and Compliance. The National Council of Nonprofits also offers resources on effective record-keeping practices.

Deadlines and Extensions

The Form 990 is typically due on the 15th day of the 5th month after the end of your fiscal year. If you need more time, you can request a six-month extension by filing Form 8868 before the original due date.

Resources: The IRS Filing Extension page provides details on how to apply for an extension.

Professional Help and Training

Don’t hesitate to seek professional help if tax filing becomes overwhelming. Hiring a tax professional who is experienced with nonprofit tax laws can be a valuable investment.

Resource: The IRS Exempt Organizations Select Check tool helps you verify the status of tax professionals.

Free Webinars and Educational Resources

The IRS and other organizations frequently offer free webinars and workshops on nonprofit tax issues. These can be invaluable for staying informed and compliant.

Resource: Visit the IRS Webinars for Tax Exempt & Government Entities page for upcoming events.

Connect with Nonprofit Networks

Networking with other nonprofits can provide additional insights into the tax filing process. Organizations like the National Council of Nonprofits or your local nonprofit association can be great resources.

Resource: The National Council of Nonprofits provides a network of support and resources for nonprofits.

Donor Acknowledgement and Reporting

If your nonprofit receives donations, it’s important to provide proper acknowledgments to donors. For certain donations, you’re required to provide a written acknowledgment for the donor to claim a tax deduction.

Resource: IRS Publication 1771, “Charitable Contributions – Substantiation and Disclosure Requirements,” offers guidance on donor acknowledgments.

Stay Informed on Tax Law Changes

Tax laws are constantly evolving, and it’s important to stay informed about changes that might affect your nonprofit. Subscribe to IRS newsletters or nonprofit law blogs to keep up to date.

Resource: The IRS Newsroom provides updates on tax law changes and other relevant news.

Plan for the Future

Finally, incorporate tax planning into your organization’s financial strategy. Anticipate future tax obligations and set aside funds if necessary. This foresight can prevent financial strain and help maintain your nonprofit’s fiscal health.

Common Pitfalls to Avoid in Non-profit Tax Filing

As a social justice nonprofit, you’re doing important work. Navigating your tax obligations doesn’t have to detract from your mission. By staying informed, maintaining good records, and seeking help when needed, you can ensure your nonprofit remains compliant and continues to thrive while avoiding these common mistakes:

• Late Filing: Failing to file on time can result in penalties and risk your tax-exempt status.
• Inaccurate Reporting: Ensure all income, expenses, and donations are reported accurately. Discrepancies can lead to audits and penalties.
• Ignoring UBIT: Not paying Unrelated Business Income Tax when required can result in fines and back taxes.
• Overlooking State and Local Taxes: Remember that tax-exempt status doesn’t automatically exempt you from state and local taxes.
• Poor Record Keeping: Inadequate records can make it difficult to complete your tax forms accurately and cause issues during audits.

Resource: Bookmark the IRS Charities and Nonprofits webpage for easy access to forms, publications, and updates specific to nonprofit organizations.

You got this.

Remember, while taxes may seem daunting, they’re a part of ensuring your nonprofit operates effectively and legally. Use these resources and tips to make the process smoother, allowing you to focus on what matters most – your mission.

Please consult with a tax professional for specific advice related to your organization’s unique circumstances. The information provided here is intended as a general guide and should not substitute for professional advice.