A Practical Guide to Tax Compliance: Nonprofit Taxes

Tax law is challenging, particularly for businesses, and there are many obstacles and dangers business owners may encounter if unprepared. Taxes and operations for nonprofits have their own special set of difficulties. In the US, the IRS has highly specific tax requirements that apply to nonprofit organizations. Nonprofit taxes have different regulations and procedures than other company types. But the stakes for understanding them are just as high. Read this guide carefully to understand your obligations. You may properly plan for tax compliance if you are aware of your requirements in advance.

Are Taxes Paid by Nonprofits?

If you have any knowledge about running a nonprofit organization in the United States, you are surely aware that they are exempt from paying taxes like other companies. However, that does not imply that they are free to disregard IRS rules.

Are taxes paid by nonprofit organizations? They are exempt from many federal and state taxes. But not all of them is the succinct response. By special IRS nonprofit filing regulations, nonprofits are nevertheless required to report tax compliance annually and make contributions to Social Security and Medicare.

Types of Nonprofit Organizations

Numerous organizations categorized under section 501(c) of the U.S. tax law fall within the category of nonprofits in the United States. The majority of charities fall under the 501(c)(3) category, which includes private foundations and other benevolent organizations established for the benefit of the public.

Advantages of a Nonprofit Company

There are many advantages for the proprietors of charities and organizations that are formally constituted. Some of these advantages are available to register or incorporate enterprises in general and NGOs in particular.

  • Charitable tax exemptions
  • Private donations to eligible NGOs are deductible for tax purposes.
  • Protects specific parties involved from monetary liability
  • Eligible for grants from both public and private sources
  • Gives businesses a distinct entity that is not connected to any private individuals

Organizational Tax Exemptions

The tax-exempt status is probably the biggest advantage of managing a nonprofit organization. The corporation is exempt from paying income taxes on its profits because it was created to serve the public interest rather than its owners.

As long as they retain their registration with the IRS, nonprofits are essentially immune from federal taxes and save from payroll-related taxes. Key tax exemptions for nonprofits include:

  • Government income tax
  • Federal real estate tax
  • S. sales tax

At the state level, many states provide exemptions from income tax and, occasionally, sales tax.

How Can Tax Exempt Status Be Maintained?

Nonprofit tax advantages significantly help your business and its objective. However, maintaining those advantages may require a lot of effort. For your organization to originally be granted tax-exempt status, you must apply. Compliance with all IRS regulations must be done carefully to maintain tax-exempt status:

  • Operations of a nonprofit must be focused on legally permissible exempt reasons. Such as the advancement of religion, science, or other clearly defined benevolent goals.
  • No direct contributions to political campaigns
  • Absence of support for any particular political contender
  • Business operations cannot directly benefit private interests or shareholders with profits.
  • The IRS requires annual information returns from nonprofit organizations that provide all financial information.

Common Tax Forms for Nonprofits

Nonprofits must file an annual return report on their finances to comply. For tax-exempt organizations, the IRS Form 990, an informative return, will typically be used in some capacity.

Forms and exemption requirements vary by state. However, the main federal tax forms you will require are as follows:

  • Form 990
  • Form 990-N
  • Type 990-EZ
  • Type 990-PF

990 IRS Form

The main form used to record nonprofit taxes is IRS Form 990. An organization’s adherence to nonprofit regulations is shown by an annual information return (AIR).

A company’s mission and organizational structure are briefly covered in Form 990. Which also includes a detailed accounting of revenues and outlays that clearly show how they relate to the declared mission.

990-N IRS Form

With a complete 990, any tax-exempt organization can satisfy its AIR requirements. Nonprofits that fall below a specific size threshold, however, may submit replacement forms that call for less exhaustive reporting.

The 990-N form is for public charities and other nonprofit organizations that typically have gross receipts of under $50,000. Simple e-postcard IRS form 990-N can be completed and submitted electronically.

990-EZ IRS Form

An intermediate return, Form 990-EZ, is available for businesses with gross yearly receipts under $200,000. The entire assets of the organization must be less than $500,000.

990-PF IRS Form

The AIR form for all private foundations with tax-exempt status is Form 990-PF. No matter what their actual financial situation or total assets are, this still holds.

When Are Nonprofits’ 2023 Tax Obligations?

Depending on the fiscal year of your organization, different non-profit deadlines apply. By the 15th of the fifth month following the conclusion of your set accounting period, you must have submitted your Form 990-AIR.

The nonprofit tax return deadline is May 15, 2023, for the tax year 2022, for the majority of organizations that use the calendar year.

Employ a CPA to Assist With Nonprofit Taxes

Although there aren’t many stages or forms that organizations must complete, the procedure can nonetheless be challenging. Your tax compliance status could be in jeopardy if you make errors in your recording and reporting.

When you have to fill out and submit your nonprofit tax return for the first time, think about working with a tax expert. An accountant can make the entire process lot easier, and nonprofit taxes don’t have to be a headache. You can rely on the professionals at Your Part Time Accountant to help you with your small business nonprofit taxes.