Nonprofits can enjoy a range of benefits through their tax exemption. Organizations such as public safety, religious, scientific, and those dedicated to the prevention of cruelty to both humans and animals can enjoy tax exemption. Donations can be tax-free for supporters who provide funding.
After working hard to become a registered nonprofit with a proper 501(C)(3) status, the job isn’t over. In order to keep the status, you’ll need to continue administrative work that’s required at both the state and federal levels.
Your Registered Agent
In Illinois, registered nonprofits must also have a registered agent with an office address within the state. Should your registered agent move, or change, you’re required to update the Secretary of State with Form NFP 105.10/105.20, so that your articles of incorporation can be updated. Failing to notify the State of any changes can lead to the termination of your organization.
As with any business or nonprofit organization, keeping records is one of the most important tasks for demonstrating compliance as well as its day-to-day operations. Without records, the nonprofit won’t be able to show how it accomplishes its mission, where monies are spent, and how it qualifies for its tax-free status as a public charity.
No specific recordkeeping systems are required, just that they accurately keep records. The type of system used will depend on the nonprofit’s needs and size. A smaller nonprofit might need nothing more than an Excel spreadsheet kept current by one employee or the free version of Wave for basic accounting. A larger nonprofit like Women Employed may use a program like SalesForce to keep track of their clientele and Quickbooks or Freshbooks to handle their financial affairs.
Whatever system a nonprofit uses, accuracy is key.
Filing Yearly Information And Tax Returns
Most 501(c)(3) organizations will be required to file information returns with the IRS declaring their income, expenses, and regular activities, as well as a tax-exempt form, Form 990-N. If the nonprofit’s gross receipts exceed $50,000 in a year’s time, it must file a formal tax return, Form 990-T.
For businesses that earn more than $1,000 in “unrelated business income”, or UBI, must be included on the tax return, since it is considered “taxable income.”
Form 990s are due the 15th day of the 5th month after the taxable year of the organization ends. That is, if the taxable year ends on December 31st, Form 990 is due on May 15th.
The Internal Revenue Service offers considerable information on the subject of tax-exempt nonprofits, including this guide to the lifecycle of charitable compliance, and this compliance guide for public charities. The IRS also has a short online course on maintaining tax-exempt status, including a PDF for those who would prefer to read it.
Illinois Revenue’s webpage has a complete listing of everything a nonprofit needs to apply for a state sales tax exemption.
Losing Tax-Exempt Status
We’ve previously discussed how a nonprofit could easily lose its tax-exempt status through mistakes or some type of misconduct.
Nonprofits that don’t stay in compliance or follow specified rules for reporting and/or lobbying face harsh penalties. For instance, the IRS can also require payment of a special excise tax by the nonprofit, especially if the organization deviates from its original mission and doesn’t update its documentation. This is especially true for organizations that migrate into lobbying or the political spectrum.
Tax reporting and returns are also important. A nonprofit that fails to file tax returns for three consecutive years will have its tax-exempt status revoked.
If a nonprofit does lose its status, it will need to work with an attorney who understands nonprofit laws and regulations to return to compliance and get back on track so that it can again be tax-exempt.
Keep Your Nonprofit Tax-Exempt Status
Whether you’re just starting up your nonprofit, or have been operating it for many years, it’s vital to ensure that you are not only legally compliant, but current with changes in laws and regulations that govern nonprofits.
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.