Prepare For Tax-Season As A Nonprofit: A Quick Guide
Tax season is no one’s favorite time of year. Even for tax-exempt organizations, dealing with the required forms and paperwork can get quickly overwhelming.
However, it’s imperative you don’t blow off this work! Your 990 is critical for your fundraising success. Pulling all of the important data included in this form and reviewing financials with your team is a great way to open up the floor for important questions and a deep reflection into your fundraising strategy.
However, to get these fundraising benefits, you must first understand the tax-season fundamentals.
This guide walks through some of the frequently asked questions nonprofits have about taxes and exemption paperwork. These questions include:
- How does my nonprofit obtain exemption status?
- Where do I file an annual return?
- What if I file my return late?
- What if my 990 is incomplete?
- Are large and small nonprofits treated the same?
- How exactly does my nonprofit benefit?
Here at File 990, it’s our goal to make tax season as painless as possible. Better understanding what tax season looks like for nonprofits will help you do more than just get through the season; you’ll make the most of it!
How does my nonprofit obtain exemption status?
Before your nonprofit can be considered “tax-exempt” in the eyes of the IRS, you must file a Form 1023 to apply. You’ll need access to information such as your organization’s:
- Official name
- Mailing address
- Employer identification number (EIN)
- A narrative description of your activities
- Names of your employees
- And more information, of course
The law also requires your organization to pay a small user fee when you turn in your application. Be sure to pay the appropriate amount when you turn in this form.
Once you’ve applied for your tax-exempt status, your job is far from done when it comes to financials and organizing your nonprofit’s services. You’ll need to invest in the best nonprofit software to help keep your tax information organized for years to come.
Investing in software like an accounting solution, CRM, and 990 e-filer will help your nonprofit have easy access to important information for filing tax forms.
If you’re unsure of where to start when it comes to software investments, try conducting research using trusted referral articles. Try skimming through this list of top nonprofit software by Snowball Fundraising to get started.
Where do I file an annual return?
Your Form 990 is the paperwork your nonprofit needs to fill out annually to remain tax-exempt. There are a couple of different ways you can turn in this paperwork depending on what’s easier for your organization.
- Mail your 990 in. You can mail in a paper version of your Form 990 to the Department of Treasury, IRS service center. If you choose to mail in your return, make sure you’ve double- and triple-checked your work to ensure everything is complete and correct.
- Use an authorized e-filer. e-Filers are a substantially faster way to submit your annual return. You get immediate recognition that the form was received, plus the processing time is faster. You’re also more likely to ensure the form is complete and correct the first time because the e-filer will guide you through answering the required questions.
Many times, 990 e-filers will pull information directly from the IRS database based on your organization’s EIN. It can pull the recurring information from your 1023 or past 990s such as your name, address, and other demographic information.
Keep in mind that your 990 is public record. No matter whether you’re filing a standard 990, 990 PF, 990-N, or 990-EZ (we’ll cover this in detail later), or filing online or by mail, the forms will be posted publicly for everyone to see if they so choose.
You may be asking, “How many people are really looking?” or “Does it really matter?” The truth is, that as long as it’s out there, the fact that people can find your 990 is really what matters. That’s why you should think carefully about your answers before you submit them and ensuring everything is legible. It can become a marketing tool when well-thought-out.
What if it’s filed late?
Individuals wouldn’t pay taxes if they didn’t need to. It’s not exactly an enjoyable process to pay money to the government. And let’s face it: nonprofit representatives feel the same way. We wouldn’t submit our Form 990s if we didn’t have to.
Your 990 is due on the 15th day of the 5th month after the end of your fiscal year. This means for nonprofits using the calendar fiscal year, your nonprofit’s return is due on May 15th.
Timeliness in submitting your Form 990 is highly enforced by the IRS. There are defined penalties for nonprofits who file late. The penalties look like this:
- If your nonprofit’s gross receipts are less than $1,000,000, you’ll receive a fee of $20 each day the return is late with a maximum penalty of $10,000 or 5% of the organization’s gross receipts, whichever is less.
- If your nonprofit’s gross receipts are more than $1,000,000, you’ll receive a fee of $100 each day the return is late with a maximum penalty of $50,000.
You’ve already worked hard to ensure your nonprofit’s budget will help you reach your top-priority goals. And goodness knows bookkeeping for nonprofits isn’t easy! The last thing you want is to reach into your already stretched-tight budget to pay unnecessary penalties. So, try to file on time.
If you anticipate that your 990 might be late, don’t fret too much. There’s another form you can file that provides an extension on your annual return deadline. A Form 8868 extends the amount of time you have to file by 6 months.
The IRS sometimes grants exceptions to the late-filing penalty, but only when a reasonable cause is stated. These are examined on a case-by-case basis and should not be relied on for any nonprofit.
The bottom line: File your Form 990 on time!
What if the 990 is incomplete?
According to Nonprofit Expert, the IRS treats incomplete returns in the same way as late returns. The penalties are the same.
That’s one of the major benefits to using an e-filer to submit your annual return: it guides you through all of the questions so you’re sure it’s complete!
In addition to ensuring your form is complete, your nonprofit should also actively work to avoid some of the common mistakes made on these forms. Many nonprofits make mistakes such as:
- Incorrectly listing the voting members of the governing body. This list should include only those voting members as of the end of the fiscal year (for nonprofits using the calendar fiscal year, this means those voting members as of December 31st).
- Not explaining new significant programs. If your nonprofit has expanded its programming during the last fiscal year, you need to report this change on your Form 990, describing the program services so that the IRS can ensure it coincides with the larger exempt purpose.
- Reporting in-kind donations. Any in-kind donations your nonprofit receives are generally recorded in your in-house financial statements according to GAAP standards. However, they are excluded from your Form 990.
Complete and correct Form 990s are also important for the sake of your nonprofit’s donors. This is one of the annual reports that they have access to and its completion is one of the ways you prove transparency with supporters.
However, this should not be the only annual report you submit to donors! Even the most complete Form 990s do not thank your donors or provide the details they want to see about your fundraising and use of financials. Only a well-crafted annual report written specifically for supporters will check those important boxes.
Are small nonprofits held to the same standard as large ones?
No matter the size of your nonprofit, large or small, you should submit an annual return every year. However, the type of 990 you file differs depending on your nonprofit’s gross receipts during the last fiscal year. There are three different 990s:
The 990-N (also known as the 990 postcard) is an 8-question online form available for nonprofits whose gross receipts are normally less than $50,000. This form cannot be filed on paper; it can only be submitted online.
It also differs from the others because there are no immediate penalties for failing to file. The IRS will send a reminder to the last known address and after three consecutive years failing to file, exempt status is revoked. This article has more information about this form if you think your nonprofit qualifies.
The 990 EZ is like Form 990’s little brother. Nonprofits who qualify to file the 990-EZ are those with less than $200,000 in gross receipts or less than $500,000 in total assets.
This form is only four pages. However, you should keep an eye out for the list of “schedules” with supplementary information that you may be required to report.
The standard Form 990 is required for nonprofits with gross receipts greater than $200,000 or those who have greater than $500,000 in total assets. However, those who qualify for the shorter forms may file this longer form choice if they really enjoy the tedious task of filing tax information.
This form is 12 pages plus the dedicated list of “schedules,” just like the 990-EZ.
If you’re in charge of the finances for a personal foundation, you should look up information about the 990-PF, but we won’t get into that here.
All of this information may seem overwhelming, but after you’ve chosen which form to file, you have the option of investing in the e-filer to simplify the actual filing process. We highly recommend this option for small to mid-sized nonprofits. Your budget is stretched tight as it is, and it’s many times less expensive to invest in software than pay late fees or hire an accountant.
How exactly does my nonprofit benefit?
In addition to the fact that your nonprofit must file to keep your tax-exempt status, making sure that everything on your 990 is accurate, complete, and well-thought-out can result in other benefits for your nonprofit.
Transparency with your supporters helps everyone better understand the financial health of your nonprofit.
You may choose to send information such as your completed 990 and your well-designed annual report to supporters. Choosing to do so can result in:
- Increased volunteer engagement
- Better relationships with donors
- A more informed board of directors
Of course, reviewing your financial information regularly can also help you have a better understanding of your nonprofit’s financial health. You can better distribute information to your team to keep everyone on the same page.
Make sure to keep your own records of your nonprofit’s Form 990 and other financial information in-house. This will make it easier to file next year.
If you decide to look for an e-filer to help your organization complete your annual return, look for one that stores your 990 for you. Then print them as well. This ensures you have both a digital and physical copy of this important form.
Hopefully, this guide will help your nonprofit better plan to organize your financial information. Maybe this year you’ll dread tax season a little less. Good luck!