Do tax-exempt nonprofit organizations have to file taxes?
Most nonprofit organizations are required to file a federal tax return each year, but some, such as churches, schools, and governmental agencies, are not. The IRS provides a list of the types of nonprofits that are not required to file federal tax returns.
Tax filing requirements also vary significantly from state to state. If you are unsure of the state filing requirements for your nonprofit organization, ask a Legal Pro or tax professional to help you figure out if and when you need to file a state tax return.
When does a nonprofit have to pay income taxes?
Generally, a nonprofit organization pays federal income tax only when it receives Unrelated Business Taxable Income (UBTI). The UBTI rules typically apply when a nonprofit organization earns income that is not related to the organization’s tax-exempt purpose. Anytime a nonprofit does activities that are not related to its tax-exempt purpose, it is a good idea to consider whether any related income is UBTI.
It is also important to know that if UBTI is excessive, the nonprofit may lose its tax-exempt status. UBTI taxes are paid on a separate tax form that is included with the nonprofit’s regularly filed tax form.
Many exemptions can cause income that would otherwise be taxable as UBTI to be non-taxable. This is a complex area of nonprofit tax law, and nonprofits should carefully review IRS guidance before filing.
What are some typical tax deductions nonprofits take?
Tax filers often include their expenses when filing to get tax deductions. Deductions can reduce the amount of taxable income. Unlike for-profit companies, nonprofit organizations are typically tax-exempt. That means they do not pay federal income tax, even if they have more revenue than expenses in a given tax year.
Nonprofit organizations that file Form 990-EZ, Form 990, or Form 990-PF are usually still required to list their expenses. These are some typical expenses a nonprofit might have:
- Grants.
- Salaries and employee benefits.
- Professional fees.
- Rent.
- Utilities.
- Printing.
- Postage.
Which tax form does a nonprofit organization use?
Nonprofit organizations usually file IRS Form 990. There are a few different types of this form, listed below along with the types of nonprofits that use them:
- Nonprofit organizations that received more than $50,000 in donations and other income typically file using Form 990 or Form 990-EZ.
- Nonprofit organizations with gross receipts under $50,000 can file using Form 990-N (also called an e-Postcard).
- Private foundations usually file using Form 990-PF.
What happens if a nonprofit organization fails to file taxes?
Failing to file tax returns on time can result in a number of adverse consequences. It’s important to understand when tax returns are due and what can be done to avoid penalties if a return cannot be filed on time.
Nonprofit Tax Deadlines
Each nonprofit is usually required to file its annual tax return with the IRS by the 15th day of the fifth month after the end of its fiscal year.
Most nonprofit organizations use a calendar year as their fiscal year, which typically means the nonprofit must file its IRS tax return by May 15 each year.
Most nonprofits can receive an additional six months to file their federal tax return by requesting an extension. The IRS generally requires the extension to be filed on or before the original due date of the return. Typically, organizations filing Form 990-N cannot file for an extension, but that form is short and can usually be completed online in minutes.
Late Filing Penalties
If a nonprofit organization does not file its tax return by the due date (or by the extension date, if an extension was filed on time), then the IRS may assess late filing fees.
For nonprofits with less than $1 million in annual income, the late filing penalty is $20 per day (up to $10,000 or 5% of the organization’s gross receipts, whichever is less).
For nonprofits with $1 million or more in annual income, the penalty increases to $100 per day (up to $50,000).
Loss of Tax-Exempt Status
In addition to late fees, a nonprofit organization that fails to file its federal tax return for three consecutive years may automatically lose its tax-exempt status.
Failing to file annual tax returns is the most common reason for a nonprofit to lose its tax-exempt status with the IRS. If this happens, the organization’s name is published in the Automatic Revocation of Exemption List.
Once revoked, the nonprofit generally must file all missing tax forms, apply for reinstatement, and pay the required filing fee to regain tax-exempt status.
What happens at tax time if a nonprofit actually turns a profit?
Many people assume that a nonprofit cannot have a profit during a tax year, meaning the organization cannot have income higher than its expenses. This misunderstanding sometimes causes nonprofits to spend money at the end of the year to avoid showing a surplus.
However, it is perfectly acceptable for a nonprofit to have a profit at the end of a tax year. In fact, many nonprofits have income that exceeds expenses in most years. Having a profit for the year does not put the organization’s tax-exempt status at risk. The IRS also does not automatically require income taxes from a nonprofit just because it had a profit during the year.
Staying compliant
Managing a nonprofit’s tax responsibilities can be complex, but understanding filing requirements and keeping accurate records are the best ways to stay in good standing with the IRS. To get help understanding what taxes your nonprofit organization should file, reinstating a nonprofit that has lost its tax-exempt status, or dealing with any other nonprofit-related legal issue, reach out to a Legal Pro for affordable legal advice.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
