A Quick Guide to Nonprofits and Tax Season 2020
Are you responsible for the accounting books at your nonprofit organization? If so, you may have many questions this time of year. Do you need to file taxes? If so, what do you need to claim, and what are your exemptions?
While many nonprofits need to file an annual information report with the IRS, not all do. Additionally, failing to meet the requirements can result in revocation of your nonprofit’s tax-exempt status — and hefty penalties. Fortunately, it isn't difficult to meet the requirements. Here's what you need to know:
What Form Do You Need to File?
All nonprofits must file Form 990, but the variation depends on the organization's structure and revenue generated. Organizations with less than $50,000 in annual income can file Form 990-EZ, or the postcard return.
Even though it sounds simple to complete, these forms are a matter of public record. Therefore, you must fill these out accurately. Organizations that receive considerable donations from one organization or individual may need to fill out specific schedules, such as Schedule B, disclosing these donors.
What Information Does IRS Request?
Similar to a corporate return, your organization will need to disclose the governance and management of your entity. It will also need to disclose the compensation of all officers, directors and employees. This compensation must be reasonable — while you can pay employees bonuses, you must adhere to IRS rules for doing so. You must withhold federal income taxes from any W-2 employees.
Also, like a corporate return, you'll need to detail your organization's income and expenses, as well as to complete the balance sheet and reconciliation of assets. As of 2019, the IRS does require the electronic filing of Form 990. They will no longer accept paper returns — so take note if you have used this method previously.
Determining Your Filing Requirements
Your filing requirements hinge on the revenue your organization generates, as well as its legal structure. For example, if your organization is any form of a 501(c), it qualifies for income tax exemption — but donations may not necessarily be tax-deductible.
Only organizations bearing the 501(c)(3) status enable outside parties to write off contributions to the organization on their taxes. A nonprofit without tax-exempt status for donors may consist of things like recreational clubs, or 501(c)(7) organizations. For example, patrons of a fish and game club can't deduct their membership dues on their personal tax returns.
It's critical to note that while 501(c) nonprofits are exempt from corporate income tax, that doesn't equate to an exemption from all taxes. You may need to pay state sales tax, for example, depending on your jurisdiction. You will still need to withhold Social Security and Medicare taxes for any W-2 employees, although you do not for independent contractors.
When Is the Filing Deadline? What Happens If I Don't File?
You probably have the No. 15 stuck in your head when it comes to taxes. If your organization's fiscal year mirrors the calendar year — many 501(c)(3) organizations do to simplify filing for donors — your deadline is May 15. In general, the deadline is the 15th day of the fifth month following the end of the accounting period. If the due date falls on a Saturday, Sunday or holiday, the due date is the next business day.
Failure to file can lead to costly penalties. IRS imposes a $20 per day penalty if the return is late. The maximum penalty is $10,000 or 5% of the organization's receipts, whichever is less. Any organization that fails to file for three consecutive tax years will automatically lose its tax-exempt status. If they do, and they were a 501(c)(3), they can no longer accept tax-exempt donations. This loss can substantially impact daily operations, and your organization may need to close its doors.
Know Your Filing Requirements for Nonprofits
If you run the accounting books for a nonprofit organization, it's crucial to stay on top of your filing requirements. Tax time is here, so get your paperwork in order today.