Tax Information for Nonprofits
(including getting tax-exempt status)
Assembled by Carter McNamara, MBA, PhDApplies to nonprofits unless otherwise noted.
Sections of This Topic Include:
Do I Need Help to Get Started?Importance of Good Record Keeping
Getting Tax-Exempt Status
Federal, State, Sales, Payroll Taxes, etc.
Preparing and Filing Form 990s (including about public disclosure)
Donations and Taxes
Unrelated Business Income Taxes (UBIT)
Lobbying and Taxes
Assessing Your Tax Management Practices
Special Topic -- When Hiring, Need Independent Contractor or Employee?
General Resources
Free,
Online, Self-Paced Program to Completely Build/Strengthen Your
Nonprofit
Do I Need Help to Get Started (with taxes, payroll, etc.)?
(If you're just getting started with your new nonprofit, then see the section Starting a Nonprofit.)
You Can Do Much of the Work Yourself -- But Get Tax Advice and Guidance
You should strongly consider getting some help with your taxes. You can do much of the work yourself, but you should have some basic guidance and advice from a tax advisor who understands nonprofit matters. For example, it's very important how you characterize your plans when filing for incorporation with your state or for tax-exemption with the IRS. In addition, there are various reports and filings you likely have to submit. When you're tax-exempt, you're likely to also be exempt from a variety of other taxes, including state, property and sales taxes. A nonprofit-knowledgable tax advisor can help you a great deal. Ask other nonprofits for references to good tax advisors. Ask a local funder. Call the accounting aid association. Note that, in Canada, you can get tax-exempt status at the provincial or federal level.The following links might also help you. See
Should I Use a CPA to
Do My Taxes?
Getting and Using
a Lawyer
Using a Payroll Service
As a new nonprofit, you should strongly consider using a payroll service. This type of service can work with your tax advisor (or provide tax advice, as well) to ensure regular and accurate withholdings for various types of taxes. The service can also produce the reports needed to file your yearly taxes. You might get a recommendation for a service by calling your local association of certified public accountants or several nonprofits that are similar in nature to yours.Importance of Good Record Keeping
Good tax management starts with good record keeping, especially financial records. You should have a basic sense aboutFinancial Statements
Getting Tax Exempt Status
You do not have to get tax-exempt status. However, you should seriously consider this because it allows you to avoid paying federal taxes on your income (within certain limits and types of income). It also helps you to raise money more easily.NOTE: Obtaining tax-exemption if often one of the steps visited when formally starting up your nonprofit. See Starting a Nonprofit.
NOTE: Most states also allow tax-exempt nonprofits to also be exempt from some types of income, sales and property taxes. To find out which taxes you might be exempt from, contact your Attorney General's office.
Basics of Getting Tax-Exemption
Look at the IRS What You Need to Know if Your Organization Plans to Apply for Tax ExemptionThen review
How do we
get a tax-exempt number?
What
sorts of organizations are exempt from federal taxes?
Tax
Exempts Must Provide Payments, Returns
IRS Form to File for Exemption
You might review the list of types of tax-exempt organizations to note (most of) the IRS's wide variety of organizations and classifications of tax-exempt nonprofits.Nonprofit organizations file for tax-exemption by using IRS Publication 557, Tax-Exempt Status for Your Organization.
Where to Get More Forms
Any needed federal forms can be downloaded from the Tax Exempt Organization Tax Kit.
Sample 501(c)(3) Application
There are a variety of tax-exempt classifications. The 501(c)(3) is one of the most well known, and is for "charitable organization". Note that this classification does not necessarily mean that the nonprofit is also tax-deductible.Form 1023 Help
Federal, State, Sales, Payroll Taxes, etc.
Tax-exempt organizations usually do not have to pay federal taxes on income. In addition, many states provide exemptions to income taxes, property taxes, sales taxes, etc. It would be extremely difficult to track and report any standard guidelines about these various types of taxes across the states. The best way to find out what taxes you have to pay is to contact your Secretary of State's office.
Using a Payroll Service
(As noted above, if you are a new business, you should strongly consider using a payroll service.)Preparing and Filing Form 990s
If the nonprofit's gross revenue is in excess of (at the time of this writing, January 2000) $25,000, the nonprofit must file Form 990. If your nonprofit is also tax-exempt, it must file Schedule A of Form 990. If your nonprofit has more than (at the time of this writing, January 2000) $1,000 of gross revenue in unrelated business income, you must file Form 990-T. Copies of your tax returns are usually open to public inspection.Form 990
6 Things the Board President Should Check Before the 990 is Filed
Quality 990 Site (has many resources)
Public Disclosure of Form 990s
What about posting 990's and other forms online?How must NPOs respond to public requests for 990s?
NPO Public Disclosure Regulations Site
Form 990 Offers Public Relations Opportunity
Donations and Taxes
Is IRS recognition necessary before we receive donations?What are the various tax benefits available to a donor?
IRS Requires Substantiation of Contributions
Also see:
Registration of Fundraising ActivitiesUnrelated Business Income Taxes (UBIT)
The IRS limits the amount the revenue a nonprofit can make that is not directly associated with the mission of the nonprofit. This is in order to prevent nonprofits from unfairly competing with for-profit organizations.Can I sell things for a profit and be tax exempt?
How is Unrelated Business Income Tax (UBIT) Calculated?
Nonprofits Often Don't Worry About UBIT (unearned income before interest and taxes) - Part 1
Nonprofits Often Don't Worry About UBIT - Part 2
The publication, Venture Forth!: The Essential Guide to Starting a Moneymaking Business in Your Nonprofit Organization, includes step-by-step guidelines to plan an earned-income venture for nonprofits, including the necessary financial analyses and forms, and guidelines about addressing UBIT.
Lobbying and Taxes
There are certain limitations on lobbying by all types of tax-exempt organizations, for example, 501(c)(3), 501(c)(4), etc.
Basics
Statement about Importance of Policy AdvocacySummary of federal rules about lobbying for 501(c)(3) organizations
Lobbying and Political Activity by Tax-Exempt Organizations
Miscellaneous Topics
Will Signing a Petition Get Us in Trouble for Lobbying?Statement about Importance of Policy Advocacy
Lobbying Rules Create Opportunities for Charities
General Resources
Summary of federal rules about lobbying for 501(c)(3) organizationsNumerous other advice provided by Nonprofit FAQ
Minnesota Council of Nonprofits' "Principles and Practices", scroll down to section on lobbying
How to Figure Lobbying Limits Under 501(h)
To Audit Your Taxation (and Legal) Practices
Legal Indicators.Be Careful: When Hiring, Need Independent Contractor or Employee?
The IRS seems increasingly skeptical about business use of independent contractors. The IRS is concerned, for example, that businesses might be avoiding employment taxes by using independent contractors instead. Therefore, businesses must be careful when determining if they should hire a contractor or an employee. The following link will help you in this regard.Potential Issues in Hiring Consultants (general information and IRS-related issues)
General Resources
IRS Service Center (dedicated to exempt organizations) -- Call 877-829-5500U.S. Tax Code
Nonprofit Resource Center
For the Category of Taxation (Nonprofit):
Related Library Topics
Recommended Books
General Information
The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just hover your cursor over the image of the book. A "bubble" of information will be displayed. You can click on the title of the book in that bubble to get more information, too.
Also See
Financial Management (Nonprofit) -- Recommended Books
