You've made it this far as a tax-exempt nonprofit but it's important to stay refreshed on how you can make sure you maintain that status. The loss of tax-exempt status could have devastating consequences for your charitable nonprofit. Whether you're a nonprofit leader, board, or staff member, it is important to be familiar with the importance of tax-exempt status, and situations that put a charitable nonprofit's tax exemption in jeopardy.
Maintaining your nonprofit's tax-exempt status under Internal Revenue Code 501(c)(3) requires you to constantly keep up with a number of routine tasks including, but are not limited to:
- Establishing a corporate board. All nonprofits must elect officers and appoint a board of directors. Board members attend regular meetings to oversee the nonprofit's proper functioning, cast votes on important issues related to the organization, and generally act in the organization's best interests. The board's major actions or decisions are typically accomplished by way of a corporate resolution and are recorded in the form of notes, within a minute book.
- Work intentionally behind your purpose. When a nonprofit applies to the IRS for tax-exempt status, a major part of the process is to clearly set forth the entity's intended goals and purpose. Once the IRS approves the goals and purpose, the nonprofit must continually operate the entity within those stated parameters. For example, if the nonprofit applied to the IRS that the entity's purpose is to operate an after-school educational youth organization, it cannot suddenly decide instead to operate a parent/teacher organization. If the nonprofit moves away from the purpose for which the tax-exempt status was issued, the IRS can potentially revoke l the organization's tax exemption altogether (in which case, federal taxes would now need to be paid).
- Documenting any donations received. If your nonprofit organization participates in fundraising activities and solicits donations from the public, as a tax-exempt nonprofit, you must be prepared to provide a receipt or some form of written acknowledgment to individuals who donate more than $250 in a calendar year.
- Adhering to an approval process for contracts and other agreements. All activities of your nonprofit organization are to benefit the interests of the public (as opposed to private interests). It's important to recognize that an approval process for doing business with any organization or individual that may have influence over the organization must be revealed to the board of directors and gain approval by that same board. In all cases, the agreements should be deemed "commercially reasonable," and cannot exceed the fair market value of the typical cost of the trade or service being provided.
- Understand & stay up to date with lobbying laws. It is important for all nonprofit organizations to have a working knowledge of and adhere to, the fairly complex set of local, state, and federal restrictions and registration requirements related to lobbying activities. **An organization may participate in lobbying activities. However, the activities cannot make up a significant part of the nonprofit's routine activities. Click here to view our IRS Compliance page and scroll down to “Advocacy, Lobbying and IRS Compliance” for a fuller discussion of this topic.
- Avoid all political campaign activities. All nonprofit organizations are strictly forbidden from participating in any event or activity that favors or endorses a particular candidate for political office. It's important to note that this also includes donations to a candidate's campaign.
- Pay taxes on unrelated business income. All 501(c)(3) organizations are required to pay state and federal taxes on "unrelated business income," meaning income generated from activities that are unrelated to the nonprofit's tax-exempt purpose. Unrelated income which exceeds $1,000 annually represents taxable income and must be included in the nonprofit's annual tax return (Form 990-T) and paid to the IRS.
- Annual Reporting Obligations & Filing annual information returns. Most, but not all, 501(c)(3) organizations are required by the IRS to file an annual information return, setting forth the organization's income, expenses, and regular activities. Nonprofit organizations whose gross receipts exceed $50,000 must file an annual federal income tax return (either Form 990, Form 990-EZ, or Form 990-PF for private foundations). By the same token, nonprofits with gross receipts equaling $50,000 or less must file a much simpler annual return called the Form 990-N.
The Pension Protection Act of 2006 added a new law that provides for automatic revocation of an organization's tax-exempt status if it fails to file a required annual information return for three consecutive years. We regularly have organizations reach out to us regarding having their 501(c)(3) status reinstated after automatic revocation. While it is entirely possible to reinstate your status, it is far, far easier to maintain your status by filing your 990 annually--so make sure you do that every year!
If you're unsure about any of the above, we highly encourage you to consult an attorney. It is very important to understand that while this list includes most of the major issues that nonprofits face while trying to maintain their tax-exempt status, it is far from comprehensive. For more information on how to maintain tax-exempt status, another great resource is the IRS, which provided five interactive online courses. At Mission Counsel, one of the main services we offer is related to IRS compliance, so please don't hesitate to reach out to us. You can schedule a free 15-minute Mission Discover Session with us here.