There is a common misconception about tax-exempt organizations and their IRS requirements. Most people don’t realize that even though these organizations are not required to pay taxes, their IRS reporting requirements are very complex.
Nonprofit organizations must go through an entire process to receive their tax-exempt status, then they must continue to meet all of their IRS requirements to maintain their status.
This is a never-ending process, organizations must continue to provide detailed information to the IRS on an annual basis for the entire life of their organization, otherwise, there are heavy consequences.
Whether you are familiarizing yourself with tax-exempt organizations, or even considering forming one, here is an overview of what you need to know about their IRS requirements and responsibilities.
How is Tax-exempt Status Attained?
Before beginning the application process for tax-exempt status, it is important to first determine if your organization qualifies as a charitable one. Does the mission that you have chosen for your organization meet these requirements?
These are considered “exempt purposes” by the IRS. Organizations that are related to the following causes are eligible to apply for tax-exempt status.
- Charitable organizations
- Religious organizations
- Organizations dedicated to education
- Organizations dedicated to literacy
- Scientific organizations
- Organizations that are dedicated to testing for public safety
- Organizations that foster national/international amateur sporting competitions
- Organizations that are dedicated to preventing cruelty to children and animals
After determining that the organization aligns with one of the causes above, you can proceed with the IRS application process. Any organization that wishes to be considered for tax exemption must complete a 1023 Series Form. Organizations should file either Form 1023 or 1023-EZ.
If the IRS approves the application, the organization will be considered a 501(c)(3) organization. The IRS will provide a determination letter, this is a crucial document. It includes the organization’s EIN and is proof of its 501(c)(3) status. Until this is received, the organization is not considered tax-exempt.
Public Charities vs. Private Foundations
When it comes to 501(c)(3) organizations, they are not all created equal. The biggest distinction between these types of organizations is a public charity and a private foundation. Understanding the differences between them is essential.
Funding
The funding source of a private foundation sets it apart. A public charity is funded mainly by donations from the general public. They actually must prove to the IRS after their first 5 years of operations that a certain amount of their funding is from public donations. This is called the Public Support test and it requires that,
the organization must receive at least ⅓ or 33% of its donations from individuals whose donations make up less than 2% of the organization’s gross receipts.
A private organization is funded in the opposite manner, it generally operates off of the funding of just one individual or a few at most. While a private organization must distribute a certain amount of funds each year to charitable organizations, there is no public support required.
Operations
These organizations also operate differently. A private foundation is managed by a few individuals, for example, a family foundation may be managed completely by a couple of key family members. This is not the case with public charities.
Public charities may be operated on a day-to-basis by employees or volunteers, likely some combination of both. They are also controlled by a board that makes decisions in regard to the organization’s mission and future.
The IRS requires specific information about the board members and employees of public charities to ensure transparency. The IRS also wants to verify that the general public is well-represented by the decision-makers of these organizations.
Annual IRS Tax Filing Requirements
Tax-exempt organizations that are considered 501(c)(3) organizations are required to file returns from the Form 990 Series on an annual basis with the IRS. Organizations use their distinction as a public charity or private foundation combined with their financial size to determine which 990 form they must file. These are the most commonly filed 990 Forms:
Form 990-N
This is sometimes referred to as the Form 990 postcard because it is a very short form that is fairly simple to complete. This form is filed by the smallest organizations, generally with annual gross receipts of $50,000 or less.
Form 990-EZ
This form is filed by slightly larger organizations but is still a relatively simple form. This is filed by organizations with annual gross receipts less than $200,000, and total assets less than $50,000.
Form 990
This is the standard “long form” that is filed by organizations with gross receipts greater than or equal to $200,000 or total assets greater than or equal to $500,000. It is very important to note here that many organizations actually choose to file the 990 rather than the 990-N or 990-EZ.
Why would they take on the extra work? Great question! Providing all the additional detailed information required on Form 990 makes it easier for smaller organizations to apply for and attain funding through grants.
Form 990-PF
This form should be filed by any private foundation regardless of its financial size. It requires slightly different information, as private foundations are operated differently from other types of 501(c)(3) organizations.
Form 990-T
This is a form that should be filed in addition to any of the Form 990 returns listed above if the organization earned $1,000 or more in gross receipts from unrelated business activities.
How are Tax-exempt Organizations required to file their Returns?
It is no mystery that the IRS prefers filing electronically to mailing in paper copies of any tax form. However, when it comes to the Form 990 Series, this is actually the required filing method.
Back in 2019, the TaxPayers First Act mandated e-filing for all organizations with a tax year beginning after July 1, 2019. From this point forward all tax-exempt nonprofits are required to file their returns electronically.
While an adjustment for many organizations, making the switch to e-filing is definitely a positive. This method of filing is proven to yield more accurate forms, with fewer errors than their paper counterparts. Choosing an IRS-authorized e-file provider for your Form 990 is a must, this ensures that your form is filed securely using the IRS e-file system.
When is the deadline to file 990 Forms?
There is no set IRS deadline that every tax-exempt organization will follow. This deadline will be determined using the organization’s tax year.
Here is the general rule, the deadline to file Form 990 is the 15th day of the 5th month following the close of the organization’s tax year.
For example, an organization with a tax year ending on June 30th will have a deadline on November 15th.
As you can see, there are many intricacies when it comes to nonprofit organizations and their IRS requirements. Hopefully, this overview provided you with some insight and clarification.
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