For nonprofits in Illinois, maintaining that “nonprofit” and, therefore, tax-exempt status is the lifeblood of the organization. Without the benefits that the IRS and the Illinois state provides to nonprofits, it would be astronomically difficult to serve your organization’s mission and purpose. Because nonprofits currently operating in Illinois offer fundamental services that help tens of thousands (if not more) people every day, the Illinois Attorney General wants to encourage more nonprofit activity in the state.
In order for a nonprofit to receive its benefits from the state, the organization must follow a strict set of regulations. Failure to follow the rules, such as engaging in certain activities, can result in a loss of a tax-exempt status. If your nonprofit organization lost its tax-exempt status, make sure to call Illinois nonprofit attorney James C. Provenza & Associates today. As a leading nonprofit law firm serving the Chicago and surrounding areas, we provide expert legal guidance to help your nonprofit grow and meet its goals.
Common Ways for a Nonprofit to Lose Its Tax-Exempt Status
Nonprofits are supposed to work for public benefit, taking donations and other funds to provide a wide range of necessary services. As such, nonprofits are categorized by their function, such as social welfare organizations and educational organizations, for example.
Most charitable organizations in Illinois have a 501(c)3 nonprofit status, which means that the organization is able to take advantage of federal and state tax exemptions. This status comes with a variety of rules set out by the IRS and the Illinois Attorney General. In exchange for a nonprofit status, organizations must make the following agreements:
- Private Benefit and Inurement – Nonprofit activities should not serve the private interests, or private benefit, of any individual or organization more than insubstantially. The nonprofit also cannot allow its income or assets to benefit insiders.
- Lobbying – A nonprofit’s lobbying activities cannot be more than an insubstantial part of its overall activities.
- Engaging in Political Activity – Nonprofits are prohibited from participating in any political campaign on behalf of (or in opposition to) any candidate running for public office. Nonprofits cannot participate in political activities at the federal, state, and local levels.
- Unrelated Business Income (UBI) – A nonprofit has to be careful when earning income from unrelated activities. Earning too much income in this manner can result in a loss of a tax-exempt status.
- Annual Reporting Requirements – Tax-exempt organizations must complete and file paperwork with the IRS (and state agencies) every year. According to the Pension Protection Act of 2006, a nonprofit organization can have an automatic revocation of its tax-exempt status if it fails to file a required annual information return for three consecutive years.
In addition to these regulations, a nonprofit organization must also keep with its professed mission and tax-exempt activities. If the nonprofit deviates from its original purposes, it must inform the IRS.
Tips for Maintaining a Tax-Exempt Status
Although the regulations seem fairly clear, a nonprofit organization can still lose its tax-exempt status without even trying. Fortunately, there are several ways for an organization to keep its status, including but not limited to:
- Know, and always complete, the required forms, including the Form 990, 990-EZ, or 990-N.
- Be diligent with documentations of solicitations. If soliciting from individuals, provide a written receipt and register and file annual reports with the Illinois state. Always provide a written acknowledgment for donations over $250 so that donors can take a tax deduction.
- Create a process for approving contracts and compensation agreements with insiders.
- Make sure you understand and follow the restrictions on lobbying, and refrain from all political activities.
- Pay taxes on unrelated business income, but make sure that the business income doesn’t outweigh the nonprofit’s activities.
If you’re unsure whether or not the nonprofit’s activities will result in a loss of your organization’s tax-exempt status, consult an attorney as soon as possible. It is crucial to understand these issues, and organize the nonprofit so that it continues following all the necessary rules.
Contact James C. Provenza & Associates Today
At James C. Provenza & Associates, P.C., we offer expert-based and comprehensive legal consultation and guidance for Illinois nonprofits. Our goal is to make sure that your nonprofit can maximize its tax-exempt activities and fundraising efforts, without risking its tax-exempt status. To speak with Illinois attorney James C. Provenza, call our Chicago law firm today at (847) 729-3939.
