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Keeping Your Nonprofit Tax Exempt Status

Running a nonprofit organization is rewarding but comes with certain responsibilities. This is especially true when it comes to taxes. As a nonprofit owner, you've worked hard to get your tax-exempt status. Note that just because you are tax-exempt does not mean that you are exempt from all taxes. Understanding your organization's tax liability and ensuring all tax due is accurately reported and paid is key to maintaining your status.

This guide will help you understand how to maintain that tax-exempt status in the future.

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Maintaining Tax-Exempt Status: A Brief Overview

Maintaining tax-exempt status for a nonprofit organization involves a careful balancing act. Business owners must adhere to various tax laws and regulations. It's essential to file the correct tax returns annually, even as a tax-exempt entity. This demonstrates ongoing compliance with the Internal Revenue Service (IRS) and state requirements. 

This includes managing employment taxes for staff. It also includes understanding state-specific tax exemptions. You will also need to accurately report any taxable income from unrelated business activities.

Staying up to date with filing requirements is key. You also need to keep meticulous financial records and understand the nuances of sales and use tax. Nonprofits must ensure their activities align with their stated mission and public support criteria to maintain their exempt status. The public support criteria are a set of guidelines used by the IRS. They help determine whether a nonprofit organization qualifies as a public charity.

Public Support Criteria

These criteria are important because they help differentiate public charities from private foundations. These two types of businesses are subject to different rules and regulations. The public support criteria focus on the sources of an organization's financial support.

To meet these criteria, a significant portion of a nonprofit's funding must come from the general public, government grants, and other public sources. This is instead of a small group of individuals or families. This ensures that the organization is genuinely serving the public interest and is not being used for private benefit.

There are two main tests for public support:

  • The One-Third Support Test: This test requires that at least one-third of the organization's total support over a five-year period comes from public sources. These sources include donations from a large number of people and government grants. It also includes contributions from other public charities.
  • The Facts and Circumstances Test: If the organization doesn't meet the above test, it can still qualify under this test. This test is more complex and considers various factors, like the organization's representative nature to the public.

Meeting these criteria is crucial for a nonprofit to maintain its status as a public charity. This helps them maintain specific tax advantages and a favorable public perception among taxpayers. Failure to meet these criteria might result in the organization being classified as a private foundation. This leads to more stringent regulations and potentially less favorable tax treatment.

Understanding and Managing Your Tax Obligations

Every year, your nonprofit must file a tax return even though it is tax-exempt. This is like a report to the government. Remember, not all money your nonprofit receives is free from business taxes. For example, if you sell things or have a small business as part of your nonprofit, that income might be taxable. You also need to know about sales tax exemption. If your nonprofit buys things for its work, you might not have to pay sales tax.

It's crucial to identify any taxable items and activities and report them accurately. Calculating the correct amount of tax due can be complex. Refer to a comprehensive tax guide tailored for nonprofit organizations and remember to keep your exemption certificate safe; you may need it to prove your status for tax purposes.

Filing the Right Tax Forms

Filing your tax forms correctly is key. Different types of organizations are required to file different tax forms. For instance, a standard 501(c)(3) charitable organization files a Form 990 for federal income tax. There are different types of 990 forms. For example, there are 990-EZ forms or 990-N, depending on the size and amount of gross receipts. Pick the one that suits your organization best.

Your state might have its own forms, too. If you have employees, you might also need to consider employment taxes. Also, if you sell things, you might have to file a use tax return. Missing a due date can cause problems, so mark your calendar!

Navigating State and Federal Tax Exemptions

Understanding the difference between state tax and federal income tax exemptions is crucial. While your nonprofit might be exempt from federal income tax, state tax laws vary. Some states require separate filings for property tax or sales tax exemptions. 

Always check with your state's Department of Revenue and the IRS for specific guidelines. Remember, tax exemption doesn't mean you never file or pay taxes; it means you're exempt under certain conditions.

Handling Finances and Record-Keeping

How you handle your money is crucial. Always keep your nonprofit's money in a separate bank account. If you use a credit card for the nonprofit, it should be just for that and not mixed with personal expenses. Keep track of all money that comes in, like donations, and goes out, such as expenses. This is called tracking your gross receipts and expenses. 

You should also keep all your tax forms, bank statements, and receipts. This supporting documentation is important if the government ever asks questions about your taxes.

Adhering to Employment Tax Requirements

If your nonprofit has employees, you're responsible for employment taxes. This includes withholding income tax from your employee's paychecks and paying Social Security and Medicare taxes. Even if you're self-employed within the nonprofit, these rules may apply to you. Filing an income tax return for these taxes is separate from your nonprofit's tax return.

Staying Within Legal Boundaries

Your nonprofit has to stick to certain rules to keep its tax-exempt status. You can't just support one person or a small group. You have to be helping a broader community. Also, make sure your activities match what you said your nonprofit does when you first received tax-exempt status. If your nonprofit makes a lot of money from business activities unrelated to your main purpose, that might be a problem.

Getting Legal Help With Maintaining Tax-Exempt Status

The final and perhaps most crucial step in maintaining your nonprofit's tax-exempt status is seeking professional legal help. A tax professional or legal advisor with experience in nonprofit organizations can provide invaluable guidance and support. They can offer tailored tax information and help with complex situations like property tax issues for out-of-state operations, for example. They can also help ensure you meet all filing requirements and tax payments.

Talk to a tax attorney today about maintaining your nonprofit's tax-exempt status.

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