Losing your tax-exempt status could have severe consequences for your nonprofit organization. Whether you are a member of staff or sit on the board of a nonprofit, it’s important to familiarize yourself with tax-exempt status and what could put that status at risk.

Below, we outline 5 ways you can keep your tax-exempt status safe and secure.

Shy Away from Politics

If your organization is classified as a 501(c)(3) nonprofit, you’re not permitted to donate to anyone running or already in political office. You can’t even make statements that in any way take a position on political candidates. If you do, you risk the IRS revoking your tax-exempt status and you’ll have to start paying taxes.

Although nonprofits can participate in lobbying activities, there are stringent rules in place to follow. For example, your lobbying may not exceed a certain percentage of your organization’s income.

Take Care of the Formalities

Like other corporations, your nonprofit is compelled to have both officers and a board of directors. However, you don’t have shareholders who receive any dividends from the organization.

Some nonprofits prefer to have members who can help with decision making. Many, however, forego a membership structure, preferring the board to make big decisions.

To remain tax-exempt, the board should meet regularly. All important decisions must be formalized complete with a resolution, and there should be a well-kept book of minutes for each and every meeting.

It’s also essential that you ensure you’re operating within the purpose for which you’ve been granted your tax exemption. For example, if you set up a nonprofit skate park for kids, you can’t suddenly decide to turn it into a dog park.

Keep Your Books In Order

If you gross more than $50,000, you must file an annual tax return using a 990 or 990EX IRS form. If your nonprofit has annual gross receipts of $50,000 or below, you need to file a 990N tax exempt form. Failure to file the correct forms could see you incur financial penalties, eventually losing your tax-exempt status.

It’s important for your nonprofit to keep financial records to keep track of the information you provide on your tax returns. If you fail to keep your books in order, you could lose your status or even risk being reclassified as a private foundation.

It’s always a good hire to use a professional bookkeeper to help keep things in order.

Account for Your Unrelated Income

It’s common for nonprofit organizations to have ‘unrelated income.’ This is income from activities that might not relate directly to your core mission, like consulting fees, marketing budget, gifts, or even the sale of merchandise.

If you have an unrelated income of $1,000 or more, it is taxable, and you must report it on your tax returns. Failure to do so could see your tax-exempt status being revoked. Since these things can get a little complex, it’s a good idea to consult an experienced lawyer if you think you have the unrelated income to declare.

Keep an Eye on Transactions

You should utilize all of your organization’s revenue for charitable purposes and not to benefit anyone personally. While it’s acceptable to pay a salary to nonprofit employees, that salary has to be reasonable and approved by your board of directors.

What’s more, if your organization wishes to do business with a director, officer, key employee or even another organization owned by any of these parties, the person is compelled to disclose their interest to your board of directors. Then, the board must approve the transaction. Further, compensation may not exceed the reasonable value of the services or goods.

It’s also worth mentioning that nonprofits cannot pay dividends. You’re also not allowed to even transfer property or funds to any individual. Should the nonprofit take the decision to dissolve, any remaining property or funds must be donated to another nonprofit organization.

If your nonprofit violates any of the above 5 rules, the IRS sees it as engaging in excess benefit transactions, which you should declare. Failure to do so means the IRS might impose an excise tax on both the nonprofit manager and the person who benefitted.

Have a Lawyer On Your Side

Maintaining your nonprofit tax exemptions isn’t as difficult as it may seem. Keep good records, file your tax returns, and follow the necessary tips we’ve outlined above.

It’s always wise to seek legal advice if your corporation has any concerns or unrelated income. This can ensure you don’t lose your nonprofit’s tax-exempt status.

Book a consultation with Principal Law Firm to discuss your concerns today.

 

 

Image: Freepik