After going through the long process of setting up your nonprofit, including becoming tax-exempt, once you start working, it’s easy to lose sight of the administrative side. But like any business, nonprofit or not, it’s important to keep track of everything, especially important business matters. Without it, all your hard work could be nullified, and your nonprofit could lose its tax-exempt status.
There are a number of reasons why your nonprofit could lose that status. Whether unintentional or an error in judgment, the IRS pays attention. Here are some of the reasons your nonprofit could find itself no longer tax-exempt.
Giving a “private benefit” or inurement. Profits are to be kept in the organization to continue doing work for the public good. Nonprofits can pay reasonable salaries to employees, but can’t otherwise pay money to individuals. Inurement involves monies going to board members, “important” employees, directors or officers, as well as things like “private deals” on a property sale.
Any such activity will not only cause the IRS to take away the tax-exempt status, but subject the individuals involved to penalty excise taxes. For an organization like a church, this could involve insiders receiving excessive contributions for their work, disbursements of funds, or an insider buying property for less-than-market value.
Lobbying to influence legislation. A nonprofit is considered to be lobbying when the leadership is contacting legislators with the intent to influence their votes, or encourages people it serves to do so. If a substantial amount of the organization’s time is spent lobbying in the political process, the IRS will remove its tax-exempt status.
Campaigning and other political activity. Endorsing or opposing any political candidate is not allowed under the IRS’s rules for nonprofit 501(c)(3) organizations, or they will lose their tax-exempt status. This includes campaigning for a candidate, contributions to a political campaign, or even speaking out for or against the candidate.
Political candidates may speak at a function, but only if there is no fundraising, other candidates for the same office are invited to speak, and if the organization doesn’t show support or opposition for any of them. However, 501(c)(4) organizations are similar, known as “social welfare organizations,” and are allowed to engage in political activities.
Violation of public policy and illegal activity. If a nonprofit participates in any activity that violates fundamental public policy or engages in any activity that’s illegal, it can easily lose its tax-exempt status. A court will consider the time spent participating in the activities. Some organizations have lost their tax-exempt status on the grounds of committing racial discrimination in education. While the organization did not violate federal or state law, it violated public policy.
Excess Unrelated Business Income (UBI). We’ve discussed this subject before in this blog, and any nonprofit that earns more in outside sales, such as merchandise, or services like childcare, than it does with fundraising, may be considered to be a commercial venture, even if the funds are used for the organization’s mission and work. Any sales or income over $1,000 in a year has to be reported as income. Continued UBI, particularly a large amount, and the IRS will then see the organization as a private enterprise, and remove its tax-exempt status.
Failing to file the annual 990 annual tax information form. Even nonprofits have to file a tax return. Even smaller nonprofits with less than $50,000 in gross receipts must file a 990-N. Nonprofits with larger receipts should file the 990, 990-EZ, 990-N, or 990-PF forms. Fortunately, these forms are online.
Not pursuing the organization’s original purpose. Any organization that files for a tax-exemption states that their mission involves, “Charitable, religious, educational, scientific, literary, testing for public safety, foster amateur sports competition, prevents cruelty to children or animals.” As organizations develop, their mission may change slightly or if your current mission need to be updated, you’ll need to notify the IRS.
While there is a lot of work involved in starting and running a nonprofit, ensuring that the organization follows the rules and keeps up with the necessary paperwork will go a long way in helping the people who truly need it.
Keep Your Nonprofit Tax-Exempt Status
For over 25 years, attorney James C. Provenza has worked with nonprofits to help them comply with the law and concentrate on doing their mission’s work. Need help? Contact our office at (847) 729-3939 today, or get in touch with our online contact form. We look forward to helping your nonprofit succeed.
