Protecting Tax Exempt Status
In order for nonprofit organizations recognized as tax exempt to maintain tax-exempt status and avoid penalties, there are certain activities that are prohibited, and certain filing and disclosures required:
- Private benefit and inurement – a public charity (organized as 501(c)(3)) and many types of non-501(c)(3) tax-exempt organizations are prohibited from allowing inurement of net earnings or assets of the organization to benefit any insider. For example, payment of unreasonable compensation to an officer, director, or key employee is considered private inurement. Further, substantial benefits (excess benefit transactions) should not be provided to private interests.
- Political campaign activities – public charities are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) a candidate for public office. Section 501(c)(4), (5) and (6) organizations may engage in political campaign activities on behalf of or in opposition to candidates for public office but must ensure that its political campaign activities do not constitute the organization’s primary activity.
- Legislative activities – a public charity is not permitted to engage in substantial legislative activity (lobbying). In general, section 501(c)(4), 501(c)(5) or 501(c)(6) tax-exempt organizations may engage in an unlimited amount of lobbying, provided that the lobbying is related to the organization’s exempt purpose. However, there is a notice and reporting requirement applicable to certain organizations that incur nondeductible lobbying and political expenses.
Filing and Disclosure Requirements
- Annual information reporting is required to be filed with the IRS via Form 990, 990-EZ, or 990-N. The type of Form 990 series return required generally is determined by the amount of the exempt organization’s gross receipts or total assets, and must be filed by the 15th day of the fifth month after the end of the organization’s annual accounting period. The due date may be extended for up to six months, although Form 990-N cannot be extended.
- Form 990-T must be filed for organizations with $1,000 or more of gross income from an unrelated trade or business during the year.
- Employment tax returns are required to be filed for wages paid to employees to report withholding and Social Security and Medicare (FICA) taxes as well as Federal Unemployment Tax (FUTA). State and local payroll reporting and remittances will also be required as applicable.
- Public charities are also subject to public inspection and disclosure requirements.
IRS Publication 4221-PC, “Compliance Guide for 501(c)(3) Public Charities”
IRS Publication 4221-NC, “Compliance Guide for Tax-Exempt Organizations (other than 501(c)(3) Public Charities and Private Foundations”)
IRS Publication 557, “Tax Exempt Status for Your Organization”
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