Tax-Smart Tips for Nonprofits

July 21st, 2024

Nonprofit organizations are generally known for two things: the varied work they perform in the name of charity and their enviable tax status.

Looking at 501(c)(3)s specifically: These nonprofits not only enjoy a well-known exemption from federal income tax, but they can sometimes also secure exemptions on state income tax, state and local sales taxes, property taxes and other benefits.

Of course, that tax-exempt status isn’t a permanent given — nonprofits must follow a number of rules to maintain the 501(c)(3) designation. Moreover, there are additional ways a nonprofit can save on their taxes outside of the 501(c)(3) advantages.

The following are some 503(c)(3) rules for maintaining tax-exempt status, as well as tax-smart tips to remain compliant and information on how to secure other tax perks.

Maintaining Tax-Exempt Status

Let’s start with the biggest tip we can provide, which is making sure you hang on to your 501(c)(3) designation. After all, without it, organizations would have a number of additional taxes piling up.

The IRS says that by abiding the rules within six areas, 501(c)(3) organizations can keep their tax-exempt status. The specific rules can be found on IRS.gov, but here’s a quick summary:

Private benefit/inurement: A 501(c)(3) organization’s activities must serve an exempt purpose, and not the private interests of an individual or organization. They also can’t allow income to benefit insiders such as board members and officers.
Lobbying: 501(c)(3) organizations’ lobbying efforts — in general, trying to influence existing legislation or the creation of new legislation — must be an insubstantial part of its activities.
Political activity: 501(c)(3) organizations cannot participate in political campaigns, whether it’s to support or oppose a candidate.
Unrelated business income (UBI): While there are exceptions, 501(c)(3) organizations can jeopardize their designation by earning too much income from business not substantially related to the organization’s exempt purpose.
Annual reporting obligation: 501(c)(3) public charities, while federally tax-exempt, still must report certain information to the IRS. Not doing so for three consecutive years can result in losing tax-exempt status.
Operation in accord with stated exempt purpose(s): In short, a 501(c)(3)’s operations must stick to their stated exempt purposes — and if they don’t, the nonprofit should let the IRS know.

With these rules in mind, here are a few important tips for keeping your designation current:

Keep Accurate Records

This is important advice for any individual, business or nonprofit organization. Accurate bookkeeping will, among other things, improve your chances of submitting an accurate filing — reducing your chances of trouble with the IRS. A few other basic pieces of records advice for nonprofits:

Give written receipts for donations of any dollar amount.
Provide written acknowledgment for donations of $250 or more.
Provide a written disclosure if a donor provides goods or services and is paid more than $75.

File Your Forms

The informational form mentioned above is the 990, which comes in four different variations:

Form 990: Nonprofits with gross receipts greater than or equal to $200,000, or total assets greater than or equal to $500,000.
Form 990EZ: Nonprofits with gross receipts of less than $200,000 and total assets of less than $500,000.
Form 990-N: Nonprofits with gross receipts of less than or equal to $50,000.
Form 990-PF: Private foundations with any level of gross receipts. Importantly, this is only used by groups whose money comes from private sources or an endowment.

Form 990 is due on the 15th day of the fifth month following the end of your organization’s taxable year. (For instance, if you operate on a calendar year, Form 990 would be due May 15 of the following year.)

Conduct Annual Audits

Some nonprofits — such as those that receive money from the federal government and spend $750,000 in applicable awards in a year — are required to conduct a “Single Audit.” And some states require nonprofits to conduct audits if their contributions/revenues surpass a predetermined threshold. But even if your nonprofit isn’t required to conduct an audit, a regular audit or financial review by an independent accountant can help ensure financial integrity and compliance with tax laws, and help build trust with donors and grantors.

Have Contract Processes

Because your organization must serve public, not private, interests, you need to establish (and follow) a process for developing and approving any compensation agreements with directors, officers and other insiders. Additionally, any business contracts with anyone that holds influence over your nonprofit should be independently reviewed and approved.

Other Ways Nonprofits Can Save

Your 501(c)(3)’s revenues might be exempt from federal income tax, but you might occasionally incur unrelated business income tax (UBIT). On that front, you may be able to deduct:

Wages
Some marketing and advertising expenses
Some professional licensing and continuing education credit costs for employees
Small repairs to an organization’s workspace
Payments for business expenses such as business-related travel and transportation
Payments for fringe benefits such as health insurance and retirement plan contributions

Do You Have Questions About Your Nonprofit’s Status

Maintaining compliance and keeping the 501(c)(3) designation is one of a nonprofit’s most important responsibilities. If you’re unsure about a situation, don’t guess your way through it.

McManamon & Co. has developed a custom suite of services to optimize your nonprofit’s performance, attain compliance, mitigate risk and reduce operating costs. Our team of nonprofit experts provides expertise in the areas of assurance, financial advisory, governance, performance improvement and tax consulting. And we serve a broad range of nonprofit organizations.

Keep your nonprofit on Uncle Sam’s good side. Call us at 440.892.8900 or contact us online today.

Tags: McManamon, nonprofit, nonprofit taxes, record-keeping, taxes | Posted in McManamon & Co., nonprofit, nonprofit taxes, taxes