Nonprofit Organizations
Nonprofit organizations are tax-exempt entities that work to promote philanthropy and change the world for the better. This article will cover what Nonprofit Organizations are and how they are taxed.
A nonprofit organization is a legal entity that promotes philanthropy or social change and does not earn a profit for its owners. Its directors, officers, and members are protected from personal liability if the nonprofit dissolves or is sued. However, it is important to remember that incorporating as a nonprofit does not guarantee a tax-exempt status. The organization must apply for federal and state tax-exempt status separately. Nonprofits are eligible for grants and other public and private funding. They can also be exempt from paying state sales, property, and income taxes.
Nonprofit Organization Tax Liability
Nonprofit organizations are not immune from tax liabilities, even if they are exempt from federal income taxes because of their IRS Section 501(c) tax exemption status. They can be liable for payroll taxes, sales and use tax, and unrelated business income tax. Directors and officers can also be held personally liable for the nonprofit’s actions or inactions if they act in bad faith.
If the nonprofit has employees, it must pay the employer’s portion of Social Security and Medicare taxes. It is also liable for reemployment taxes. If the nonprofit fails to pay its employment taxes, the IRS takes these obligations seriously and will go after the individual founders, directors, and check signers.
A nonprofit must evaluate its potential sales tax obligations before making any in-person or online sales. It should first consider its home state’s rules and potentially available exemptions and then determine if it has a “substantial nexus” in other states by considering its physical presence there (e.g., office, employees, programs) or its online sales activities.
How to Report Taxes as Nonprofits?
While nonprofits are not as heavily regulated as for-profit companies, they still need to follow the rules and pay their share of taxes. For example, they must incorporate, register with the state that has authority over charitable solicitations, and file IRS Form 990 or 990-EZ each year to show their finances, activities, and governance processes. They must also abide by ethical standards and develop policies to support efficiency and cost-effectiveness. Nonprofits can get help from the IRS’ E-file for Charities and Non-Profits service.
The 990 form collects information on your organization’s revenue, expenses, board members, achievements, and operational details. It is important to keep the 990 up-to-date, as inaccurate or incomplete information can result in loss of tax-exempt status. You can get help from a professional tax preparer to avoid errors and omissions.
Nonprofit organizations must be careful to avoid unrelated business income tax (UBIT) by using donated funds for only charitable purposes. For instance, they cannot use the funds to buy a new car or finance a vacation. They must also abide by other requirements, such as keeping accurate financial records and preparing reports for the IRS.
In addition, they must maintain separate bank accounts for the charity and its for-profit operations. Moreover, they should not engage in any profit-seeking activities, such as selling merchandise or advertising on television. Moreover, they should refrain from setting up taxable subsidiaries. Such subsidiaries can complicate accounting procedures and may subject them to UBIT. Furthermore, they can cause dissension among employees since some staffers will have greater compensation gains than others.
