Running a nonprofit involves managing numerous responsibilities, with one of the utmost importance being compliance with IRS tax Obligations regulations.
The IRS offers nonprofits the advantage of exemption from federal income taxes under specific laws and regulations. However, even after attaining tax-exempt status, organizations are required to submit annual Form 990 returns to report their financial details, activities, and other relevant information to the IRS.
In this blog post, we will offer comprehensive guidance on the essential steps nonprofits need to carry out to ensure ongoing compliance with IRS regulations.
IRS Classification of Nonprofits
Generally, the IRS classifies nonprofits under a specific Internal Revenue Code (IRC) section, which determines their eligibility for tax-exempt status based on their type, objectives, and primary purposes.
There are many different sections under which an organization can be classified, and the most common one is IRC Section 501(c)(3). This section includes organizations advancing charitable, educational, religious, scientific, or literary purposes. Similarly, nonprofits focused on promoting social welfare, such as employee associations, can seek tax-exempt status under IRC Section 501(c)(4).
These classifications are key for nonprofits to understand as they define the requirements for obtaining and maintaining tax-exempt status under federal tax Obligations law.
Overview of Form 990
990 Forms are specifically devised by the IRS to streamline the activities of nonprofit organizations. These forms gather essential information such as income, expenses, liabilities, and assets from nonprofits and aid the IRS in verifying that these organizations adhere to established regulations.
Furthermore, Form 990 offers nonprofits a platform to publicly disclose details about their programs, which enhances transparency and accountability of the organization. These practices help build trust with the public, thereby contributing to fostering donations and support for the nonprofit’s mission.
Understanding Different 990 Forms
There are different versions of 990 available, with each of them having a specific filing requirement. Based on the financial size and type, the nonprofits must choose and file the applicable 990 forms every year.
Here is a comprehensive breakdown of each 990 form:
- Form 990-N
Form 990-N(e-postcard) is designed for small non-profit organizations with annual gross receipts of $50,000 or less. This form is commonly known as the e-postcard due to its simplified structure, which requires minimal details.
- Form 990-EZ
Form 990-EZ (Short Form Return of Organization Exempt from Income Tax) applies for small to mid-range non-profits with gross receipts below $200,000 and assets less than $500,000.
- Form 990
Form 990 (Return of Organization Exempt from Income Tax) is required for large nonprofit organizations with gross receipts equal to or exceeding $200,000 (or) assets equal to or exceeding $500,000.
Note: Non-profit organizations eligible to file e-postcard Form 990-N may optionally choose to file Forms 990-EZ or 990, but not the other way around.
- Form 990-PF
Form 990-PF (Return of Private Organization) must be submitted by the organizations classified as private foundations under IRC section 501(c)(3), regardless of their financial structure.
- Form 990-T
Form 990-T (Exempt Organization Business Income Tax Return) serves as a supporting form, and organizations with $1,000 or more yielded through Unrelated Business Income (UBI) must file this form and pay the applicable taxes.
Information Reported on Form 990
While preparing the 990 forms, nonprofits generally need to provide the following essential information.
- Organization details, including the legal name, Employer Identification Number (EIN), address, and contact information of the organization
- Revenue, expenses, assets, net liabilities, and other financial information.
- Activities carried out by the organization.
- Program service accomplishments made during the tax Obligations year.
- Details about unrelated businesses, transactions, and more.
- Compensation details of some key members of the organization.
These information required are directed in a way that tends to both the IRS requirements and public disclosure obligations. Furthermore, this information may vary depending on the form the organization must use.
What are the Additional Filing Requirements for Form 990?
Organizations that file Form 990 are mandated to complete and submit additional forms called Schedules alongside their primary 990 forms. These Schedules are utilized by the IRS to gain supplementary insights into the information provided on the main form. There are 16 different Schedules, each with its own purpose. The filers of Form 990 are required to complete distinct schedules based on their specific filing requirements. Note that the 990-N filers are not required to submit any Schedules.
When is the Deadline to File Form 990?
All Form 990 submissions must be filed by the 15th day of the 5th month following the end of the organization’s tax year, whether it follows a calendar year or a fiscal year. For instance, organizations following the calendar tax Obligations year must submit their 990 forms by May 15th every year. If organizations follow a fiscal tax year instead of the calendar year, the deadline for submitting the 990 forms will adjust accordingly based on the end of their fiscal year. Let’s say the organization’s fiscal year ends on September 30th. Then, the deadline for filing Form 990 would be February 15th of the following year.
Extensions and Penalties For 990
If nonprofits fail to file the required forms before the deadline, they may face penalties ranging from $20 to $120 per day, depending on the size of the organization. Additionally, it’s crucial to note that failing to file the 990 returns for more than three consecutive years can result in the automatic revocation of the organization’s tax-exempt status.
If an organization needs more time to prepare and submit the 990 forms, they can request an extension using Form 8868 (Application for Extension of Time To File an Exempt Organization Return). This form provides an extension of up to 6 months over the original deadline.
However, Form 990-N filers are exempt from these penalty charges and extension requirements.
E-file Mandate for Form 990
According to IRS regulations, all 990 forms must be submitted electronically. This could be accomplished by employing an IRS-authorized e-file provider. Here are some of the best practices that nonprofits should follow during the 990 e-filing.
- Begin early and give sufficient time for preparation.
- Gather all necessary financial documents and information.
- Review the IRS instructions and seek assistance if needed.
- Double-check calculations and ensure consistency in reporting.
- Maintain records for future reference and audits.
Conclusion
Addressing the 990 filing obligations might seem daunting, yet it stands as a crucial procedure for nonprofits to showcase their responsibility and dedication toward society. With a thorough understanding of the 990 filing complexities, nonprofits can emphasize their commitment to accountability and build trust in turn reinforcing their key role in fostering positive change within communities for a longer time.
Tags: Tax ComplianceTax Obligations