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NONPROFITS: Don’t Ignore These Tax Issues

The tax-exempt status that nonprofit organizations enjoy does not relieve them of all tax-related concerns. If you are involved with a nonprofit in a leadership capacity, you’ll want to understand the tax issues that could affect your organization. Here is a brief rundown.

Exemption application. An organization cannot simply assume it is exempt from income taxes because it is operated as a nonprofit. A formal application for tax exemption must be submitted to the IRS. Section 501(c) of the Internal Revenue Code describes several types of organizations that can qualify for exemption. Section 501(c)(3) public charities are an example.

Annual IRS filings. Nonprofit organizations (other than religious organizations) generally must file an annual information return (Form 990 or 990-EZ) with the IRS. Very small nonprofits having gross receipts of less than $50,000 may electronically submit Form 990-N (known as the e-Postcard). If your organization uses the calendar year for tax reporting purposes, the deadline for filing your 2014 return is May 15, 2015.

Unrelated business income. Income that is substantially related to the pursuit of your organization’s exempt purpose generally is not subject to income taxes. However, if your organization regularly engages in non-exempt business activities, the net income from those activities would be subject to tax as unrelated business taxable income (UBTI). Although unrelated business income can be a helpful source of revenue, exercise caution. When it becomes “substantial,” it can threaten an organization’s exempt status.

You can’t assume that an activity is related to your organization’s exempt function simply because it raises needed funds for the organization. The IRS looks at the activity itself, not the use of the income generated by the activity. An example of income that could be taxed as UBTI would be revenue from selling an organization’s membership list on a commercial basis.

Executive compensation. The IRS carefully scrutinizes the compensation and benefits received by charitable organization executives for reasonableness. It has the authority to levy costly penalties (called “intermediate sanctions”) on those involved in “excess benefit transactions.”

Donor receipts. If your organization is a Section 501(c)(3) organization that solicits tax-deductible contributions from the general public, you’ll want to be sure you are providing donors with the required records they need to substantiate their deductions.