Kristin Garrison, MS-SFP, CGW
While we’ve now moved beyond the personal and for-profit business tax filing deadlines, the tax clock ticks on for charities operating within the nonprofit sector. The topic of nonprofit tax compliance fits well with KGA Nonprofit Consulting‘s scope of practice and its core values of accountability and trust. As a fund development professional and certified grant writer, I strive to educate others about their responsibilities regarding nonprofit compliance reporting, and the implications of errant practices. Doing so helps to strengthen nonprofit leadership and promotes professional standards of excellence.
The Matter of Due Diligence
In their efforts to balance mission delivery and resource development, nonprofit leaders face many challenging tasks. The most important aspect in generating public support, financial or otherwise is the element of trust. Trust is never a given. It is often hard to gain, but easy to lose. One way board leadership instills trust among its stakeholders, is by exercising their duty of obedience through compliance with state and federal laws. Leaders who are new to the nonprofit sector structure, must familiarize themselves with tax reporting and other legal requirements, or operate with great risk.
Reward, Responsibility, Risk
To move a nonprofit’s mission forward, its leaders must generate income, and spend capital. The tax-exempt status or 501 © (3) status allows a nonprofit to accept donations tax-free, however, most all tax-exempt organizations are required to submit an annual 990 tax reports to the Internal Revenue Service (IRS). A few exceptions are religious organizations, i.e., a church, or schools affiliated with a church. In addition, certain government and political organizations are not required to submit an annual 990 tax return.
The 990-tax return helps to enforce financial reporting and shares information about how a nonprofit’s finances related to its stated mission. Analysis of 990 reports reveals whether an organization continues to meet the requirements of public support and offers a means to explain any potential or appearance of conflicts of interest. If an organization files late and submits incomplete or erroneous information the IRS may levy sizeable fines. Noteworthy, if an organization fails to report its taxes for three consecutive years, the IRS will automatically revoke the non-compliant organization’s tax-exempt status. Because the information detailed on the 990-tax form helps to inform the public about an individual charity’s financial status, sources of funding, its leadership, and highest-paid staff, a detailed tax return can go a long way in generating public trust and future support. In contrast, the absence of information leaves one to question why the information was omitted.
Charity Watch Dogs
The IRS is not the only one that expects an organization to file an annual tax return. Charity watchdog groups such as the Better Business Bureau, Candid, and Charity Navigator, actively monitor nonprofit organizational reporting and financial transparency to help prospective beneficiaries, donors, employees, vendors, etc. assess the quality of a prospective organization. These groups generate a nonprofit charitable rating for an organization, which is based on their review of the organization’s legal and financial reporting. In scoring nonprofits, charity watchdogs review the organization’s annual state filings, federal 990 tax returns, and self-published 990s, audits, and annual reports shared on the nonprofit’s website. They also conduct a 990 analysis of monies that the organization allocated to the program, fund development, and administrative expenses. Among a pool of potential grant candidates, charity ratings serve as one measure to help prospective funders determine which candidates demonstrate greater capacity and overall leadership to manage the grant award.
The Fiscal Year
The IRS allows nonprofits to choose when to begin and end their fiscal year, based on what works best for their programmatic activity and governance. Regardless, of the organization’s fiscal year, nonprofits should submit their tax return no later than 5 months after the close of the fiscal year. If an organization’s fiscal year mirrors the calendar year (January to December), then the 990 is due May 15 of the following year. Many nonprofits begin their fiscal year in July and end in June. In this example, the 990 is due in November of the same year.
990 Tax Reports
Below is a breakdown of the various 990 forms and characteristics of each. Many start-ups with limited funding utilize the 990N or e-postcard. Other growth-oriented or mature phase nonprofits will file a 990-EZ or full 990 forms.
|990 N||990 EZ||990||990 PF||990 T|
|Annual gross receipts < $50,000||Annual gross receipts < $200,000 and total year-end assets < $500,000||Annual gross receipts of >$200,000, and yearly total assets of $500,000 or greater||501 (c)(3) exempt private foundations with or without operating programs||Nonprofits with > than $1,000 in unrelated taxable business income|
990 Tax Reporting Process
All 990 tax returns are filed electronically by creating an online account with IRS at http://www.IRS.gov. The 990 N requires basic organizational information and asks the preparer to confirm that the organization has had gross receipts of less than $50,000. While most nonprofits leaders can complete a 990 N, it’s wise to consult a certified public accountant (CPA) to help with preparing an organization’s more involved 990 EZ, 990, 990 PF, 990-T returns.
Even when a start-up organization can technically file a 990N, its leaders should consider filing a 990 EZ. The 990 EZ provides a full tax copy with recorded financials and therefore, greater financial transparency. Once completing the appropriate version of the 990 EZ, 990, of 990 PF, 990-T, a copy of the return should be kept in the corporate record book and made available to the public upon request. Additionally, best practice recommends that nonprofits take it one step further and upload a pdf 990 copy to Candid, and on their organizational websites. The goal of the tax reporting process is to achieve reporting compliance as well as to establish trust among current and potential stakeholders.
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Better Business Bureau (n.d.). BBB helps businesses. Retrieved April 21, 2022from:
Candid (n.d.). Get the information you need to do good. Retrieved April 21, 2021, from: https://candid.org/
Charity Navigator (n.d.). Our charity rating process. Retrieved April 21, 2022, from: https://www.charitywatch.org/our-charity-rating-process#the-rating-basics
Internal Revenue Service (n.d.). Instructions for form 990 return of organization exempt from income tax. Retrieved April 21, 2021, from: https://www.irs.gov/pub/irs-pdf/i990.pdf