For federal tax purposes, an organization is exempted from taxation, if it is organized and operated exclusively with the purpose to promote or assist a particular social cause. To be exempted the organization must apply to the Internal Revenue Service (IRS) and meet the requirements and conditions to be recognized as a tax exempt by the internal revenue service. The IRS may grant the tax-exempt status for income-tax filing, payment, and deducting purposes, on donations and other funds directly related to its charitable purpose, but the granting does not apply to other federal taxes.
Not-for-profit organizations could benefit from the state and the city non-for-profit exemptions, however, it is not guaranteed, and generally the organization must apply and meet their requirements which may differ from the IRS. It is relevant to understand that tax exemption granted in some cases include the removal of a particular taxable item rather than a deduction; and that the exemption granted may depend on multiple criteria. In any case, after the exemptions has been granted, reporting and filing taxes to the tax authorities is still mandatory to keep the status.
To keep your nonprofit tax exemptions status we recommend you the following:
- Operate according with the tax-exempt status granted
If you want to eliminate risk of losing tax-exempt status, keep your activities within the range of requirements and conditions you applied and were granted for. If you stop doing a significant amount of activities outside the activities you told the IRS you were going to do in the application, you could lose your exemption. If you change the purpose of your organization you must inform the IRS to prevent problems.
- Unrelated Business Income
Having too much income generated from activities unrelated to the exempt function of the organization can potentially jeopardize the organization. The unrelated business income must be reported and the organization must pay taxes on that income.
- Avoid lobbying
Lobbying is when an organization contacts, or urges the public to contact, members or employees of a legislative body (or any executive branch official who may participate in the formulation of legislation) for the purpose of proposing, supporting, or opposing legislation, or when the organization advocates the adoption or rejection of legislation. It is relevant that directors of non-for-profit organizations understand and avoid the restrictions on lobbying activities. Engaging in substantial lobbying it is a huge risk of losing your tax-exempt status.
- Keep transparency in your records
The federal and state restrictions and registration requirements are complex and require record-keeping of the activities and the expenses. Keep transparency in the records of all activities and transactions of your non-for-profit organization.
- File the annual tax return with the IRS and follow the schedule
If your organization has filing requirements, file your annual return. The IRS provides the Form 990 also known as the ‘Return of Organization Exempt From Income Tax’ so the non-for-profit organizations can provide to the public with their financial information. The variance of the form required is generally determined by the public charity’s gross receipts and the value of its assets. Failure to file the return will incur in penalties, and the organization could be in risk of being rejected and lose the tax-exempt status.
The regulations and requirements of the non-for-profit organizations are beyond the above recommendations, we intend to keep our clients informed on relevant topics; if you run a non-for-profit and you are not sure if you are failing to comply with the conditions set by the IRS for your activity, give us a call. We are glad to assist you with any or all of your accounting, tax, and business matters.