Established with the key objective to serve a specific cause or group, non-profit organizations play an important role in society. They provide essential services and support to vulnerable communities across the country.
One of the key benefits of running a non-profit organization is that they are exempt from paying federal taxes. This helps them make the most of the resources they have to achieve their mission.
However, once a non-profit acquires the tax-exempt status it needs to maintain it or the IRS will revert the organization to a private entity and ask them to pay the appropriate federal taxes.
Maintaining the tax-exempt status is not easy as it involves strict adherence to specific requirements and regulations.
This article explores the steps you should take to maintain your non-profit’s tax-exempt status so you can continue to make a positive impact in the community.
Obtaining Tax-Exempt Status for a Non-profit
The IRS provides non-profits with an exemption from paying federal income tax through section 503(c)(3) of its Internal Revenue Code (IRC).
Non-profits typically include religious, educational, scientific, literal, public safety, and charitable organizations that provide services that benefit the general public.
To obtain the tax-exempt status, a non-profit must submit an application with the IRS under IRC Section 503(c)(3). Otherwise, the organization will operate as a private entity and be required to pay the applicable federal taxes.
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The steps you need to follow to obtain the tax-exempt status for your non-profit include:
- Familiarize yourself with the applicable IRC provisions to establish a non-profit organization that qualifies for tax exemption.
- Develop a comprehensive work plan for your non-profit.
- Prepare and file the necessary 503(c)(3) documents for your non-profit.
- Hire a qualified registered agent and obtain an Employer Identification Number (EIN) for your tax-exempt non-profit.
- Get approval from the IRS that your non-profit organization is exempt from paying federal income taxes.
Maintaining Your Tax-Exempt Status
You’re required to perform several tasks for your non-profit organization to maintain its tax-exempt status. Here are some of the important ones.
Set Up a Board
To maintain your tax-exempt status, you must establish a board for your non-profit and appoint people to serve as directors of the board. The board members will meet regularly to ensure the organization is running properly.
They will also vote on important issues that affect the organization and perform any other functions that help the non-profit achieve its goals. When the board meets, all its major actions and decisions should be recorded in the form of minutes of a meeting for future reference.
Have a Purpose
When applying to the IRS for your non-profit to be exempted from paying tax, you must clearly specify the scope and purpose of your organization.
Which services are you providing to benefit the general public?
Are you setting up a foundation to provide shelter to underserved communities? Do you want to set up a soccer academy to support the youth in your community and prevent them from joining criminal gangs?
Once your organization’s scope and purpose are approved by the IRS, you must operate the non-profit within those parameters.
For example, if you created a non-profit to provide scholarships to underprivileged children, you cannot transform the non-profit into a sports organization. If you want to expand your scope, reach out to the IRS and they will advise you on what to do.
Document the Donations You Receive
If your non-profit accepts donations from the public, then you must document the amounts you receive and issue the donors who give large amounts with an acknowledgment receipt.
Your donors will use the receipts to apply for tax deductions at the end of the year, so your records need to show that they donated funds to your organization.
However, bear in mind that charitable donations are not just made in cash. An individual can also donate to your non-profit by providing goods or services.
To maintain your tax exempt status, you must provide a fair market estimate of the goods and services you have received as a donation and provide this information in the donor’s receipt.
Avoid Political Activities
Your non-profit must not engage in any activity or event that favors a candidate who is running for a political office. This also includes donating to a political candidate’s election campaign.
Adhere to Lobbying Laws
Non-profits should adhere to lobbying laws. Your organization can take part in lobbying activities but they should not make up a significant portion of your normal activities.
Pay Taxes on Unrelated Business Income
If your non-profit generates income from activities that are not related to your organization’s tax exempt status, you are required to pay appropriate taxes on that income.
You’re required to report the unrelated income in your annual tax returns and pay the relevant taxes to the IRS.
File Your Annual Information Returns
Most organizations with tax-exempt status are required to file their annual information returns outlining their income, regular activities, and expenses.
What Happens When You Don’t Comply with Irc 503(C)(3) Regulations
Non-profits that don’t comply with the regulations highlighted above lose their tax-exempt status. Losing the tax exemption status has many consequences, such as:
- The non-profit will be required to pay corporate taxes annually.
- The organization may be subjected to back taxes and penalties for not paying federal income taxes.
- The non-profit will be removed from the list of organizations that can receive tax-deductible charitable contributions.
Non-profit organizations enjoy tax-exempt status for the amazing work they do in the community. However, this status can be revoked should the organization fail to comply with the relevant rules and regulations.
Follow the tips mentioned above to maintain your tax-exempt status so you can continue to impact your community positively.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
About the Author/s
The New Jersey Digest is a new jersey magazine that has chronicled daily life in the Garden State for over 10 years.