- It has registered as an exempt nonprofit organization with the IRS, and
- It has no business income from activities unrelated to its exempt purpose.
Registration as a Nonprofit Organization
Registration is quite straightforward.The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group's existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000, don't even have to register to be considered exempt.
Unrelated Business Income
More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization's exempt purpose. Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn't pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Rents from leasing out real property, interest income, and dividends are not subject to tax.
Annual Returns for Exempt Organizations
Once it's registered, a nonprofit with gross receipts that exceed $50,000 will have to file an annual information return on Form 990 or 990-EZ. The IRS Form 990 is a public document that is available on GuideStar, and also from the charitable nonprofit, upon request, in accordance with IRS “public disclosure” regulations. Just as with a tax return, there are penalties for filing Form 990 or 990-EZ late or failing to file.
Those exempt organizations with receipts of $50,000 or less must still file an annual return electronically on Form 990-N. There is no penalty on an organization that is required to file Form 990-N but fails to do so. However, if an organizations fails to file an annual return for three consecutive years, its exempt status is revoked. Generally, the filing deadline is the 15th day of the fifth month after the organization's year-end.
Tax filing requirements for nonprofits can be confusing. Many nonprofits consult with experts in nonprofit accounting to ensure that their financial and tax planning meets legal requirements and supports their strategic goals.
Washington DC tax preparation firm, Myrick CPA, provides nonprofit accounting services and guidance in financial and business needs of nonprofit organizations. Contact us if you need assistance in satisfying any of the tax reporting or recordkeeping requirements.