How to File Nonprofit Taxes
If you’re confused about how to file nonprofit taxes, you’re not alone. Because nonprofit organizations have tax exempt status, it can be a bit confusing. But it’s important to understand that all nonprofits are required by the Internal Revenue Service to file nonprofit taxes, which is filing Form 990.
If an organization fails to file this form three years in a row, they risk losing their tax exempt status and being placed on the IRS’ “Revoked” list. This is a public record that funders check during their screening process to ensure a nonprofit’s tax exempt status is active.
Tax exempt status allows your funders to receive tax benefits for their donations. It could be the difference between a donation and a rejection. The good news is that filing taxes takes less than 10 minutes for most nonprofit organizations and costs under $50.
I know that was a lot, so let’s break this down into simple, understandable chunks!
Let’s start with a commonly misunderstood fact: a nonprofit is a nonprofit whether or not it has a tax exempt designation.
Why do nonprofit organizations have to file taxes?
Not all nonprofit organizations generate revenue. The truth is many nonprofit Founders are self-funding their organizations. So, you may be thinking you do not need to file taxes. But almost every nonprofit* is required to file some form of the 990 EVERY year, regardless of generating no, a small, or large amount of revenue.
*The exception to this rule are churches who are exempt from filing taxes based on Section 6033(a)(3)(A)(i) which exempts churches, their integrated auxiliaries, and conventions of churches from filing Form 990 (Check the exemption letter that your organization received from the IRS to find out for sure.) The Freedom From Religion Foundation filed a lawsuit claiming that the tax code gave churches preferential treatment, thus constituting "discrimination on the basis of religion in violation of the Establishment Clause."
To qualify for exemption, an organization must continually comply with nonprofit requirements to remain tax-exempt.
Specifically, the IRS uses the 990 to ensure nonprofits are:
Continually meeting financial support requirements,
Not operating for the private benefits of individuals within the organization; and
Remaining organized for charitable purposes that allow them to maintain their tax-exempt status.
Form 990 also informs the public about crucial aspects of your nonprofit. Most of the pages and tables are available for public inspection, including those describing executive compensation and program expenditures. Potential donors and grantors can, and many routinely do, look at an organization's Form 990 before making decisions about charitable giving. The media and nonprofit watchdog groups may also check out 990s.
When do nonprofit organizations have to file taxes?
The due date for all 990 filers is the 15th day of the 5th month of their fiscal year.
For instance, if your fiscal year coincides with the calendar year ending on December 31st, you must file Form 990 by May 15th of the following year. However, if your fiscal year happens to end on June 30th, you must file Form 990 by November 15th of the same year.
So, even if your organization is not generating revenue, it MUST file taxes by submitting Form 990 to provide the IRS with information about your nonprofit's activities and financial status to demonstrate that your nonprofit still meets the qualifications for tax exemption. Not filing for three consecutive years puts your organization in danger of automatic revocation of tax exemption. That means the organization will have to pay taxes—unless it qualifies to have the IRS reinstate your status as tax-exempt.
FORM 990
Like personal tax forms, Form 990 provides the IRS with the information it needs to determine if the nonprofit is operating within the legal realms of a tax exempt organization.
For example, it’s not enough to just give basic information on expenditures. Part IX of Form 990 requires those expenditures to be broken down into three classes:
Program service expenses
Management and general expenses
Fundraising expenses.
These classes do not replace expense categories, however, but rather provide a further breakdown of the category.
Schedule A – Public Charity Status and Public Support: Schedule A is required of all filers and is used primarily to determine if a public charity has a sufficiently broad level of donor support (the Public Support Test). 501(c)(3) public charities that do not maintain a 5-year average of at least ⅓ of their revenue coming from a relatively broad base (small donors, government grants, etc.) may have their status downgraded to a private foundation.
Schedule L – Transactions With Interested Persons: Nonprofits that have business or other dealings with what the IRS calls disqualified persons, such as board members, officers, key employees, and significant donors (or people related to them), must disclose and detail these transactions on Schedule L. This is an area of high-level scrutiny, where the IRS is looking for evidence of improper self-dealing. Adopting a comprehensive conflict-of-interest policy, and following it, goes a long way to preventing problems here.
In short, the IRS uses Form 990 for other reasons besides collecting taxes. They use it to find out information about the nonprofit to help them determine if the organization is operating according to the criteria of the designated tax exempt status.
So, if the organization doesn’t submit a 990 in three consecutive years, the tax exempt status will automatically be revoked because the IRS wants to ensure the organization is not improperly operating.
Many news articles feature organizations rife with mismanagement of funds, embezzlement, and self-dealing. The only way the IRS can monitor organizations is through Form 990.
What are the IRS tax forms for nonprofits? Nonprofits are required to submit a form 990 that correlates to the organization’s gross revenue.
Small tax-exempt organizations generally are eligible to file Form 990-N (e-Postcard) to satisfy their annual reporting requirement if their annual gross receipts are normally $50,000 or less.
Form 990-EZ can be filed by organizations with gross receipts of less than $200,000 and total assets of less than $500,000 at the end of their tax year.
To file Form 990 (long form), a nonprofit should have a gross income of more than $200,000 during the past fiscal year. Also, nonprofits with assets collectively valued greater than $500,000 must file Form 990, even if their revenue is less than $200,000.
How to File Nonprofit Taxes
Now that you have a better understanding of why nonprofits are required to file Form 990 every year in operation, let’s look at how to file taxes for nonprofit organizations.
Filing Form 990-N, e-Postcard
As a result of a recent change, all non-profit organizations must now file Form 990 electronically. Under the Taxpayer First Act enacted in July of 2019, all organizations with tax-exempt statuses must e-file their taxes, starting in 2020.
Small tax-exempt organizations (those normally with annual gross receipts up to $50,000 may be required to file an annual electronic notice—Form 990-N—Electronic Notice (e-Postcard Form 990-N).
Beginning August 1, 2022, smaller charities that are eligible and choose to file Form 990-N, Electronic Notice for Tax-Exempt Organizations (e-Postcard), must sign into the IRS modernized authentication platform.
When accessing the Form 990-N Electronic Filing system, you will have three options:
Sign in with your existing IRS username: Users with an active IRS username have the option to access the Form 990-N submission page using their active IRS credentials.
Sign in with your existing ID.me account: Users that have an ID.me account to access other IRS online services or from a state or federal agency can sign in using their existing ID.me account.
Create a new ID.me account: Users that don’t have an active IRS username credential must register and sign in with ID.me. ID.me account creation requires an email address and multi-factor authentication. Form 990-N filers who have an existing IRS username and register for an ID.me account must use the same email address.
Form 990-N must be completed and filed electronically. There is no paper form. The IRS recommends not using a smartphone or tablet to file your Form 990-N.
Use the Form 990-N Electronic Filing System (e-Postcard) User Guide when registering and filing.
Electronic filing provides fast acknowledgment that the IRS has received the return and reduces normal processing time, making compliance with reporting and disclosure requirements easier. Charities and nonprofits can file the following forms electronically through an IRS Authorized e-File Provider.
Because this financial document may determine whether the IRS revokes your organization’s tax exempt status or not, I strongly recommend nonprofit leaders to seek advice from a professional tax advisor on filing 990-EZ or Long Form.
Taxes, tax laws, and IRS forms are complicated and require a specific level of expertise. If prepared incorrectly, your organization has a much greater chance of experiencing an IRS examination
Each preparer will have their own rates based on their years of experience but as a point of reference, the fee range is $1,500 to $3,000, depending on the quality of your accounting records.
Fees for filing are as follows:
ePostcard: $0
900EZ Short Form: $500 - $850
990 Full - $750 - $1,700
Find an accountant with nonprofit experience to file your form.
The best way to get the most accurate information is from the IRS itself. The following toll-free numbers are provided for Charities and Nonprofits having account, tax law, or technical questions.
Have tax law questions or need help completing Forms 990/990-EZ? Call 877-829-5500.
Have e-file technical questions? Call the IRS e-Help Desk at 866-255-0654.
FAQs
Is a nonprofit tax exempt?
Not necessarily. A nonprofit can exist without having a tax exempt status. The IRS requires a nonprofit organization to file forms every year to retain its tax exempt status. If a nonprofit fails to do so three years in a row, its tax exempt status may be revoked. However, a tax exempt organization is a nonprofit.
Do all nonprofits have to pay taxes?
Not all nonprofits have to pay taxes. Political organizations, churches, and other religious organizations, are exempt from filing an annual Form 990. This
Can a nonprofit get a tax refund?
Unlike for-profit entities, 501(c)(3) organizations can't write off financial losses to reduce overall tax liability. Since this is how tax refunds are generated, a nonprofit cannot get a tax refund.
Equip yourself with the right information with “How to Build the Nonprofit Infrastructure”.
