The IRS has established various sections of the Internal Revenue Code (IRC) to grant tax exemption to organizations involved in activities that further exempt purposes, provided they meet the requirements.

Each nonprofit organization will be classified under one of these sections, which is determined by their type of organization, operational methods, and primary purpose.

For example, corporations, funds, and foundations operating for religious, charitable, scientific, literary, or educational purposes are eligible for tax-exempt status under IRC Section 501(c)(3).

On the other hand, nonprofit organizations promoting social welfare, such as employee associations, qualify for tax exemption under IRC Section 501(c)(4).

It’s important for each nonprofit to be aware of its IRS classification, as it is vital for understanding the requirements for obtaining and maintaining tax-exempt status.

Requirements to be Eligible for Tax Exemption

The requirements for nonprofits vary depending on the section of the IRC under which they are classified. However, certain criteria apply universally to all nonprofits, regardless of their classification. These requirements are:

• No part of the nonprofit’s net earnings should benefit any private shareholder.
• Participation in political and lobbying activities is to be limited (and reported using the corresponding forms)
• The organization should never be involved in any sort of activity that is against the law.

Upon meeting these fundamental requirements, along with any additional criteria outlined in the corresponding IRC section, your nonprofit organization becomes eligible to apply for tax-exempt status.

Obtaining Tax-Exempt Status

In order to be recognized as exempt by the IRS, you will first need to submit an application. Like the above-mentioned requirements, your application may vary slightly depending on what type of nonprofit organization you run.

Many organizations that are organized and founded for a charitable purpose can apply for tax exempt status by filing Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. For example, a hospital founded with the purpose of providing emergency healthcare to individuals regardless of whether or not they are able to pay, could apply for exemption using Form 1023.

Other types of organizations that are founded to promote social welfare but are not considered a 501(c)(3) exempt organization can file Form 1024 – Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code. Some examples of types of organizations that can file Form 1024 are Business Leagues, social clubs, and recreational clubs.

Once you determine your nonprofit’s type, you’ll use the corresponding application form. Upon approval, the IRS will issue a determination letter confirming your organization’s tax-exempt status.

It’s important to note that certain exemptions exist. For instance, churches are automatically tax-exempt and do not need to file any application forms.

Tax Filing Requirements for Nonprofits

While obtaining initial tax exemption is a significant milestone for a nonprofit, maintaining exempt status is an ongoing process. This is where IRS Form 990 comes into play!

Form 990 is an annual information return that tax-exempt organizations must file to report specific information required by the IRS. This filing is crucial for maintaining compliance, ensuring transparency, and retaining tax-exempt status. This tax return requires the following information and more:

• Revenue, expenses, assets, net liabilities, and other financial information.
• Activities carried out by the organization.
• Program service accomplishments made during the tax year.
• Details about unrelated businesses, transactions, and more.
• Compensation details of some of the key members of the organization.

Providing this information to the IRS enables your nonprofit to demonstrate ongoing compliance with established guidelines and regulations.

Different Variants of Form 990

Depending on the type of nonprofit, there are a variety of different 990 Forms that an organization can file. From the information below, you can learn more about your corresponding 990 form.

There are several different types of forms in the IRS 990 Series. The specific form that your organization should file depends on its finances and structure. Here is a description of each:

• Form 990-N – Filed by organizations with gross receipts of less than or equal to $50,000.
• Form 990-EZ – Filed by organizations with gross receipts of less than $200,000 and total assets less than $500,000.
• Form 990 – Filed by organizations with gross receipts greater than or equal to $200,000 (or) total assets greater than or equal to $500,000.
• Form 990-PF – Specifically filed by nonprofits classified as ‘Private Foundations’ by the IRS.

In addition to the forms mentioned above, your organization may also be required to file additional forms. If your organization generated income of $1,000 or more from unrelated businesses or trade, you must file Form 990-T in addition to your Form 990/990-EZ.

Based on the information you provided on your 990 Form, you may be required to provide additional information by attaching Schedules–these provide the IRS with additional required information on certain aspects of your organization.

For example, if your organization is classified as a public charity by the IRS, you must include Schedule A to provide substantial details proving your organization’s public support.

Similarly, if your organization has received a contribution of $5,000 or more from any single contributor during the tax year, you must include Schedule B to elaborate on the contribution(s) received.

Deadline to File Form 990

Just like all the other tax filings, the IRS has established a deadline for filing 990 returns as well. 990 returns are generally due on the 15th day of the 5th month after the end of an organization’s accounting period. If this falls on a weekend or a federal holiday, nonprofits should file by the next business day.

Therefore, organizations operating on a calendar tax year will have a deadline of May 15th.

If your nonprofit operates on a fiscal tax year, check out the table below to find your organization’s deadline:

While these deadlines apply to the majority of nonprofits for filing their 990 returns, a few organizations may have slightly different deadlines for submitting their Form 990-T.

For example, Employees’ trusts, defined in section 401(a), IRAs (including SEPs and SIMPLEs), Roth IRAs, Coverdell ESAs, or 408(a) (Archer MSAs), are required to file Form 990-T by the 15th day of the 4th month after the end of the organization’s accounting period.

What Happens If You Miss the Filing Deadline

Failing to file 990 returns can have some nasty consequences–both on your wallet and on the overall status of your organization. In terms of financial consequences, nonprofits that fail to file Form 990 on time are subject to daily penalties, which can range from $20 to $110 per day, depending on the gross receipts of the organization. For smaller organizations, the maximum penalty can be up to $11,000, while for larger organizations, it can reach $56,000 or 5% of the gross receipts.

Note: There is no penalty for late filing of Form 990-N.

Moreover, if a nonprofit fails to file Form 990 for three consecutive years, it risks automatic revocation of its tax-exempt status. This means that the organization will no longer be exempt from paying federal income taxes.

While there is an option to reinstate tax-exempt status by following procedures established by the IRS, it is advisable to avoid such situations by filing 990 returns on time.

Extension of Time to File Form 990

Of course, there may be times when you are unable to prepare and file your nonprofit’s 990 return on time. In such cases, you always have the option to avoid unnecessary penalties by requesting an extension.

Form 8868 is necessary to request an extension of time for filing your nonprofit’s 990 returns. By submitting Form 8868, you can extend the Form 990 filing deadline by up to 6 months.

Moreover, this extension is automatic, eliminating the need for your organization to provide any reason for requesting more time. Utilizing this extension can be incredibly beneficial in avoiding penalties and maintaining your organization’s good standing with the IRS.

IRS E-file Mandate for Nonprofits

With the enactment of the “Taxpayer Act of 2019,” the IRS now mandates that nonprofits file their 990 forms electronically – paper options are no longer available.

What this really means is that you’ll need to find a reliable e-file provider that you can use to facilitate your nonprofit’s 990 filing. When looking for a provider, be sure to confirm that they are an IRS-authorized e-filer and support all the required forms and schedules!

Conclusion

Remember, tax compliance through Form 990 is not only about meeting IRS requirements—it also significantly influences your nonprofit’s reputation and standing among the public.

990 Forms enable your organization to be transparent about how you utilize donations and contributions received throughout the year. This transparency reassures potential donors of the positive impact your organization has, potentially motivating them to become contributing members. The chance to enhance your nonprofit’s public integrity alone makes filing a Form 990 worthwhile!

Now that you have a better understanding of what the 990 Form is and why filing it on time is important, take the time to find the right e-filing service for your organization!