Non-Profit Corporations (“Non-Profits”) are named as such because their goal is to not turn a profit but to promote a public interest, such as a charitable, religious or scientific organization. The biggest benefit of operating a Non-Profit is that they can qualify for tax exempt status for state sales, property and income tax, meaning that the organization does not have to pay any of these taxes.
In order to obtain this exempt status, Non-Profits have to file a 501(c)(3) status with the IRS. Find out more information about Non-Profits and what is required to obtain this exempt status. If your organization does not qualify for exempt status, then all tax liabilities of a regular corporation apply.
While a qualified Non-Profit does not have to pay any taxes, it still must file a Form 990 with the IRS every year. This form is due on the 15th day of the 5th month following the end of the Non-Profit’s fiscal year. If it ends with the calendar year, then the Form must be filed by May 15th. If a NFP fails to file this form three years in a row, the IRS will automatically revoke that organization’s exempt status and there is no appeal process for this revocation. Do not make this mistake as revocation of exempt status means that the organization will have to pay income taxes. This has frequently happened to small Non-Profits that don’t realize that even with low gross receipts (under $50,000) that they still have to file a Form 900.
There are a few different Form 990s that can be filed and will be dependent on the income received by the organization. More than $50,000 in income requires a Form 990 or Form 990-EZ. Less than $50,000 in income and a Form 990-N (e-postcard, which can be filed only online and requires only minimal information) can be used. If the organization is a private foundation then file a Form 990-PF.
Form 990s must be available to be reviewed by the public as well as the Form 1023 which is used to apply for tax exempt status. This helps the public to be assured that a Non-Profit is operating in a way consistent with its charitable intention or mission. In this way, a Form 990 can be used as a public relations tool to assist in picking a charitable organization to support.
Since there are no taxes to be paid, the Form 990 serves more as an informational form. It includes information about the organizations activities and accomplishments of the prior year, describing its mission statement, how the organization is governed and lists the names of its officers, directors and others that are involved with managing the organization. It also does include financial information on revenue, expenses, assets and liabilities. This is all to assist the IRS and the public in making sure that the organization’s operations are consistent with its non-profit goals to maintain its tax-exempt status.
Some Non-Profits do not have to file a Form 990 at all such as faith-based organizations like churches or missionary organizations, state universities and government corporations.
Unrelated Business Income Tax
There are instances where a tax exempt Non-Profit will still have to pay taxes. The IRS was concerned that tax exempt organizations were being given an unfair advantage over for-profit corporations. To address any possible unfair advantage, the IRS added in a provision that requires Non-Profits to pay taxes on any income received from any commercial activity that falls outside of the scope of its intended exempt purpose. This is called the Unrelated Business Income Tax (“UBIT”). The UBIT laws are fairly complex so it is best to leave the interpretation of these to your tax professional but it is something that you should be aware of when considering engaging in any revenue generating activity that may not be aligned with your organization’s goals. Another problem with participating in too many commercial activities outside your organization’s scope is the potential for the IRS to reevaluate your organization’s exempt status. Doing so could result in your organization being perceived as a regular commercial business.
Payroll for employees works the same way for Non-Profits as it does for other corporations. Tax exempt status does not mean that the organization doesn’t have to withhold taxes on its employees’ wages. Non-profits are still responsible for withholding federal income tax, Social Security and Medicare taxes and Federal unemployment taxes.