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 lawyer 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 if any related income is UBTI. It is also important to know that if the 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 complicated area of nonprofit tax law, and it may be best to ask for professional help if your nonprofit has UBTI.
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:
- Salaries and employee benefits.
- Professional fees.
Which tax form does a nonprofit organization use?
Nonprofit organizations usually file IRS Form 990. There are a few different types of this form, and we list them 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 of less than $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 the nonprofit organization's 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 extra six months to file their federal tax return by requesting an extension. The IRS usually requires the extension to be filed on or before the due date of the nonprofit's tax return. Typically, nonprofit organizations filing Form 990-N cannot file for an extension, but Form 990-N is unlikely to take more than 10 or 15 minutes to complete and file online.
Late Filing Penalties
If a nonprofit organization does not file its tax return by the due date (or by the extension due date if an extension was filed on time), then the IRS may require late filing fees. For nonprofit organizations that have received less than $1 million in donations and other income, the late filing penalty is $20 for each day the return is late (up to $10,000 or 5% of the nonprofit's gross receipts, whichever is less). For nonprofit organizations that have received $1 million or more in income, the late filing penalty is $100 for each day the return is late (up to $50,000).
Loss of Tax Exempt Status
Besides having to pay late fees, a nonprofit organization that fails to file its federal tax return for three years in a row 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 IRS typically publishes the nonprofit's name in the Automatic Revocation of Exemption List. Once a nonprofit's tax-exempt status has been revoked, the nonprofit generally must catch up on the late tax filings, apply for reinstatement, and pay the filing fee to get its tax-exempt status back.
What happens at tax time if a nonprofit actually turns a profit?
Many people assume or have been told that a nonprofit cannot have a profit during a tax year, meaning the nonprofit cannot have income higher than its expenses. This misunderstanding sometimes causes nonprofits to spend money at the end of the tax year to ensure that they do not have any profit.
However, it is often perfectly acceptable for a nonprofit to have a profit at the end of a tax year. In fact, many nonprofits have income that is higher than their costs in most tax years. Having a profit for the year does not put the nonprofit organization's tax-exempt status at risk. Also, the IRS does not necessarily require income taxes from a nonprofit organization just because it had a profit during the tax year.
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 Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.