If you hope to manage a nonprofit organization, it’s important to know the rules affecting tax return preparation. However, the tax requirements and statuses for nonprofit organizations can be complex and differ between subsets of nonprofits, which could leave you with questions. Below are some questions to help you and your accountant with tax return preparation.

What to Know About Taxes If You’re a Nonprofit Organization

Do nonprofit organizations pay taxes?

If a nonprofit organization is tax-exempt, the organizers don’t have to pay taxes. In order to be a tax-exempt organization, you have to qualify as a 501(c)(3) organization.

These organizations have to be created solely for charitable, religious, public safety, or science-related interests, and all their income has to be given to legally recognized charities, except for the cost of expenses to operate. 

How does my organization become tax-exempt?

If your organization grosses less than $5,000 annually or is a church, you do not have to apply for tax-exempt status, as you’re already granted it. If your organization grosses more than $5,000, you have to file a Form 1023 or Form 1023-EZ with the IRS to be granted tax-exempt status.

In order to do so, your organization’s official documents must assert that it will not be involved in political campaigns or expenses, and that income and assets won’t be used for personal gain or pay (except to pay fair wages to workers). Additionally, you must show that at least one-third of your income comes from public sources and donations.

If my organization is tax-exempt, what does that apply to?

If you’re granted tax-exempt status, your organization won’t have to pay federal taxes, property taxes, sales taxes, or state taxes. You do have to pay employee taxes like Medicare and Social Security.

If your organization offers products or services not directly related to its cause to get more income, like ongoing fundraising activities, UBTI (Unrelated Business Taxable Income) will be taxed. Having tax-exempt status also means that donations made to you are deductible for the donors.

Does my tax-exempt nonprofit organization still have to file a tax return?

Yes, except for churches—unless they have UBTI. In general, tax-exempt nonprofits must file a version of Form 990 with the IRS each year, which outlines their purpose, activities, spending, and gross income.

Not filing this form can cause you to lose tax-exempt status, so it’s crucial to stay organized and have everything you need for your tax return preparation. This will include detailed expenses, income, and tangible accomplishments your organization has done over the past year.

If you need help with tax return preparation for your nonprofit organization, contact the certified accountants at Arehart Associates in Waynesboro, VA. For over 40 years, they’ve aided nonprofits with accurate tax return preparation and filing. Their accounting and bookkeeping team has over 200 years’ combined experience, and they’ll work with you to ensure accurate reporting and filing. Learn more about their bookkeeping and tax return preparation services online, and call (540) 949-0124 to arrange a consultation.