Just because you’re a tax-exempt organization doesn’t mean that you don’t have to file a tax return. But, the IRS does try to make compliance easy for smaller organizations.
Who needs to file
When most people think of tax-exempt organizations, also known as nonprofit or not-for-profit organizations, they think of charitable organizations which are exempt from tax under §501(c)(3) of the Internal Revenue Code. Those terms really refer to any organization exempt from tax under §501(a) of the Code, plus a few others. In addition to the charitable organizations that we’re all familiar with, tax-exempts include:
- Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
- Labor, Agricultural, and Horticultural Organizations
- Business Leagues, Chambers of Commerce, Real Estate Boards, Etc.
- Social and Recreational Clubs
- Domestic Fraternal Societies and Associations
- And a lot more. Here’s a list of all the different types and the code sections which exempt them.
Tip: The link above comes from guidestar.org. Guidestar is a great resource which lets you see the tax returns for many exempt organizations, and it’s free.
Note: Churches, their integrated auxiliaries, and conventions or associations of churches generally do not need to file an income tax return. Consult your tax advisor if you think you’re exempt from filing.
Income tax returns filed by exempt organizations
Exempt organizations generally must file one of the following tax returns:
- Form 990, Return of Organization Exempt From Income Tax
- Form 990-EZ, Short Form Return of Organization Exempt From Income Tax
- Form 990-N (e-Postcard). This isn’t really a form, it’s an online filing.
And if the organization has Unrelated Business Taxable Income (UBTI, more on that below), it may need to file:
- Form 990-T, Exempt Organization Business Income Tax Return
Form 990-T is filed in addition to one of the three forms above.
Note: This discussion does not cover organizations that are classified as Private Foundations by the IRS rules. Private Foundations generally must file Form 990-PF.
Tip: This discussion only considers income tax returns. Other types of returns may also be needed. For example, tax-exempt organizations with employees have to file payroll tax returns just like any other employer.
Which forms are required
Your filing requirements are based on some simple financial information from your organization.
Form 990-N (e-Postcard)
Most small tax-exempt organizations with annual gross receipts that are normally $50,000 or less are required to submit Form 990-N (e-Postcard).
At one time this was a paper form. Now, it can only be filed online at:
https://epostcard.form990.org/
You’ll need the following information to complete the submission:
- Your organization’s Employer Identification Number (EIN). This is sometimes referred to as your Taxpayer Identification Number (TIN). Your organization gets an EIN even if it doesn’t have employees. The EIN is has nine digits and is formatted XX-XXXXXXX.
- Your organization’s legal name
- Other names your organization uses, if any (Doing Business As or DBA names)
- Be able to answer the following questions:
- Has your organization terminated or gone out of business?
- Are your gross receipts normally $50,000 or less
- Your organization’s mailing address and an email address (if you have one)
- Your organization’s website address (if you have one)
- The name and address of one of your organization’s principal officers
There is no fee to file Form 990-N.
The due date for filing is four months and 15 days after the end of your organization’s fiscal year. For organizations on a calendar year, that’s May 15.
Once the IRS receives and processes your e-Postcard (usually within 30 minutes), you will receive an email indicating whether your e-Postcard was accepted or rejected. If accepted, you are done for the year. If rejected, the email will tell you why it was rejected and how to correct the problem.
The following organizations cannot use Form 990-N even if their gross receipts are under $50,000:
- Section 509(a)(3) supporting organizations
- Section 527 (political) organizations
Form 990-EZ
Most tax-exempt organizations with:
- Gross receipts less than $200,000; and
- Total assets at the end of the year under $500,000
can file Form 990-EZ. As the name implies, Form 990-EZ is a shorter and easier version of the full Form 990. Some organizations may be able to complete Form 990-EZ internally, but many or most will want to have the form prepared by a professional. A paper copy of the 2013 form is available at:
http://www.irs.gov/pub/irs-pdf/f990ez.pdf
And the 2013 instructions: http://www.irs.gov/pub/irs-pdf/i990ez.pdf
You may need to file additional schedules with the Form 990-EZ. The form questions and the instructions should tell you what additional schedules are required.
Form 990
The full Form 990 must be filed by organizations with:
- Gross receipts of $200,000 or greater; or
- Total assets at the end of the year of $500,000 or greater
The Form 990 and supporting schedules can be difficult to prepare – consider engaging a paid professional to prepare them.
Form 990-T
You must file Form 990-T if your organization has gross unrelated business income (UBI) of $1,000 or more. Form 990-T is filed in addition to the returns discussed above. For example, if your normal gross receipts are $30,000 and you have gross UBI of $1,500, you must file Form 990-N (or higher), plus file Form 990-T.
Unrelated business income is income from an activity which isn’t related to your exempt function. The filing threshold of $1,000 is based on gross income, which is defined as gross receipts reduced by cost of goods sold. Other expenses are not considered to determine the filing requirement.
Gross UBI less applicable deductions gives unrelated business taxable income (UBTI). If your organization has positive UBTI, you may have to pay tax on it.
UBTI is a complex topic, but the general rule is that an activity is an unrelated trade or business if all of the following conditions exist:
- The organization is conducting a trade or business for the production of income from selling goods or performing services;
- The trade or business is regularly carried on; and
- The activity is “not substantially related” to the carrying out of the organization’s exempt purpose.
Note: Certain types of income, such as interest, dividends, and rental income, are generally excluded from UBTI.
Example 1
A homeless shelter owns a car wash which it operates year-round. The income from the car wash is UBTI because: it’s producing income from selling goods or performing services; the activity is regularly carried on; and the activity is not substantially related to the organization’s exempt purpose of caring for the homeless.
It does not matter that the funds generated by the car wash are used for the organization’s exempt purpose. The car wash itself is not related to the exempt purpose. The idea is to put businesses run by exempt organizations on a level playing field with for-profit competitors.
Next, suppose the car wash had a bad year. It had revenues of $25,000 but expenses of $25,500. Although the car wash had a net -$500 loss for the year, it had gross revenue of $25,000, which is over the $1,000 filing threshold. The organization must file Form 990-T for the year.
Tip: If you have gross UBI under $1,000 and your UBTI is a net loss, you may want to file Form 990-T (although not required) in order to establish the loss, which can be carried forward to offset income in profitable years.
Filing at a higher level than required
A tax-exempt organization which qualifies to file Form 990-N may choose to file Form 990-EZ or Form 990.
An organization which qualifies to file Form 990-EZ may choose to file Form 990.
Why would you choose to file a more complicated return than required? The reason is usually funding. If your organization applies for grants from private foundations or other sources, you may be asked to provide a Form 990 or a Form 990-EZ. They may want to see several years of returns. This is especially true if you do not have financial statements prepared by an accountant. So, if you qualify for a lower level of filing but may be seeking grants in the future, consider filing at a higher level now.
Note: This is a brief discussion of a complex topic. As always, consult your tax advisor regarding your organization’s tax filings.
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