A nonprofit (aka, not-for-profit) organization is a group, typically a business organization, whose primary objective is to invest the revenues it generates into fulfilling its objective and not to distribute profits among the owners, directors, or shareholders. Nonprofits are often profitable and generate substantial income at the end of the year. All the activities that help generate revenues and trigger expenses have to be reported to the IRS.
Nonprofit organizations are typically structured as corporations although other legal forms are common too, such as trusts or associations.
Each state may have different rules and regulations for granting a nonprofit status. Once the status is granted and recognized on state and federal level, a nonprofit organization may apply for tax-exempt status. Keep in mind that nonprofit and tax-exempt are not synonyms and do not always go together. In order to become tax-exempt, an organization has to be nonprofit first and then apply for tax-exemption.
There are almost 30 different types of nonprofit tax-exempt organizations. Sometimes they are called 501(c) and arguably the most common among them is a public charity 501(c)(3) that encompasses groups of religious, charitable, scientific, public safety, literary, and educational purpose. Nonprofit organizations that want to fall under 501(c)(3) umbrella apply using Form 1023, and all the others use form 1024.
There are two situations when nonprofit organization becomes tax-exempt without the need to apply for it. First, if it’s a religious organization (i.e. church) or second, a non-private organization with annual receipts from donors that do not surpass $5,000.
Once the organization is granted a tax-exempt privileges it does not have to pay taxes if at the end of the year it shows profit. There are two general ways in which nonprofit organizations make money: through activities that are related to its purpose and other unrelated activities. Related activities that generate profit will be exempt from taxes. However, the organization may be responsible for state and federal taxes if sources of its income come from unrelated sources. This typically does not create any problems for the organization but if it generates much profit from unrelated activities, it may be reclassified as a different type of 501(c). To make things less confusing, the IRS instituted that activities performed by volunteers, sales of donated goods, or actions performed for the benefits of the members are not taxed regardless of those being related or unrelated to the organization’s purpose. The IRS created Form 990-T for tax-exempt organizations to specify sources of unrelated income and compute appropriate tax payment.
Types of 990 Forms
Non-profit organizations present their tax returns by filing Form 990, Return of Organization Exempt from Income Tax:
- Form 990, Gross Receipts >$200,000 and Total Assets >$500,000
- Form 990-EZ, Gross Receipts <$200,000 and Total Assets <$500,000
- Form 990-PF, Private Foundations
- Form 990-N, also called e-Postcard, Gross Receipts <$50,000
Form 990 is quite extensive, composed of 12 sections asking for financial summary, organization’s mission objective, management, compensation, and then details of revenues and expenses. Instructions to the form itself are almost 100 pages long and assistance of an accountant is highly recommended. For help in getting required paperwork in order, nonprofit organizations may consider using QuickBooks Premier Nonprofit Edition. The software, besides performing all the essential accounting functions is specifically designed to assist in tax preparation and generating necessary forms to meet Form 990 requirements. It also prepares donor contribution reports, income and expense reports, financial accountability of executives in charge, and donations statement among others.
When, where and how to file
Forms 990 and 990-EZ have to be filed by the 15th of the fifth month after the end of the organization’s fiscal year. For organizations whose accounting period runs from January 1st to December 31st, due date to file the required forms is May 15th. If more time is needed to prepare tax returns, the organization can file for extension using Form 8868.
In some cases, nonprofit organizations are required to file taxes electronically. For those who mail the returns, check Instructions to Form 990 for the current mailing address.
- Form 990, Return of Organization Exempt from Income Tax
- Form 990-T, Exempt Organization Business Income Tax Return
- Form 8868
- Form 1023, Application for Recognition of Exemption, Section 501(c)(3)
- Form 1024, Application for Recognition of Exemption, Section 501(a)
- Publication 557, Tax Exempt Status for Your Organization
- Publication 598, Tax on Unrelated Business Income of Exempt Organizations