From the outside looking in, the nonprofit tax situation might seem cloudy. Even some nonprofit business owners are unfamiliar with all of the nuances in their company’s unique tax structure. If you’re starting a nonprofit, weeding through various tax laws might leave you with more questions than when you began, and you might still be wondering: do nonprofits pay taxes?
The short answer: sometimes.
A nonprofit’s tax requirements are complicated, often dictated by their activities, business purpose, their state or city’s requirements and more. There are 27 different types of nonprofits in the federal tax code, and some aren’t actually exempt from taxes. These cases, however, are not common, since most nonprofits receive some type of tax benefits.
Common Nonprofit Tax Exemptions
Let’s refer to the most common type of tax-exempt nonprofit organization, the 501(c)(3). Most nonprofits fall into this category and enjoy numerous tax benefits. First and foremost, they aren’t required to pay federal income taxes. In most cases, they won’t owe income taxes at the state level either, as long as they present their IRS “letter of determination” to the state’s Department of Revenue. And it doesn’t stop there. A large percentage of 501(c)(3) nonprofits are also exempt from sales and property taxes. In exchange for all this, however, the organization must meet several important conditions.
Maintaining Tax-Exempt Status
If tax-exempt status was easily accessible, every company in the U.S. would have it. But the reality is that tax-exempt nonprofits have to meet very specific requirements. A 501(c)(3), for example, must be organized for one of the following purposes: educational, religious, charitable, scientific, literary, public safety, preventing child and animal cruelty, and certain national or international amateur sports competitions.
Beyond the startup phase, nonprofits have to keep a close eye on their financial and accounting practices, or they could be stripped of their status. For this reason, many nonprofits have benefitted from hiring a Cg CPA to help maintain it. If your nonprofit has tax-exempt status, here’s what you should do to preserve it:
- Ensure that profit doesn’t go directly to private parties, whether individuals or corporations. Your income must go to a charitable purpose, not personal benefit.
- Don’t change your business purpose or earn income from activities unrelated to your initially-stated purpose. For example, if you run an after school literacy program, the company shouldn’t profit from selling t-shirts on the side.
- Don’t donate to or publically support any political campaigns. Individual members an employees can support candidates of their choosing, but the nonprofit itself shouldn’t contribute to any political agendas.
- Follow the generally accepted accounting principles and, if necessary, hire a reliable CPA like the ones at Cg to complete an annual audit.
- If your nonprofit brings in gross receipts over $200,000 per year, file a Form 990 or 990EZ (see below).
Which Taxes Might a Nonprofit Pay?
For the most part, nonprofits are exempt from most individual and corporate taxes. There are certain circumstances, however, they may need to make payments. For example, if your nonprofit earns any income from activities unrelated to its purpose, it will owe income taxes on that amount. Any nonprofit that hires employees will also need to pay employee taxes like Social Security, Medicare and, in some cases, Unemployment Taxes.
While most states won’t require nonprofit organizations to pay the state income tax, some have specific fees or special requirements to prove your tax-exempt status. It’s a good idea to familiarize yourself with your state’s specific tax laws.
About Form 990
Most tax-exempt nonprofits – with the exception of religious and political organizations – are required to file an IRS form 990, 990EZ, or 990-N, depending on your organization’s income. Essentially, this is a snapshot of your nonprofit’s business activities, including revenues, expenses, assets, and liabilities. Its purpose is to hold nonprofits accountable and confirm that they are earning and spending money solely on their specifically-stated mission, not personal pursuits, other business ventures, or anything else. The information reported on this form is available to the public, so in running your nonprofit, be sure that you don’t make any expenditures or profits you wouldn’t want out in the open.
Cg Is Your Nonprofit Tax Navigator
There are a lot of variables to consider when determining which taxes your nonprofit might owe. Fortunately for you, our team of CPAs have been helping nonprofits untangle this web and maintain tax-exempt status for four decades. We’ve handled tax compliance for just about every nonprofit structure there is, helping them avoid penalties. Whether you need help with tax forms, annual audits, or ongoing accounting services, our team of experienced, caring CPAs will set up your nonprofit for long-term financial success.