Maintaining a tax exemption status can be tricky.

Did you know there are 27 different types of nonprofit designations in the federal tax code? That’s a lot of designations! And, knowing what (or if) these matter to your business can be hard.

That’s why we’re here to help. We understand that tax requirements are complicated which is why we’ve outlined some of our top tips below.

Qualifying Entities

The US Department of Treasury regulates which businesses are tax-exempt. These are all defined under Section 501(c)(3) of the US Internal Revenue Code. This code specifies which types of businesses are exempt including private foundations, public charities, and private operating foundations.

Purpose Limitations

In order to qualify as tax-exempt, a nonprofit must exist for a charitable purpose. Charitable purposes are defined in IRS Publication 557 which includes a list of things deemed charitable. Some of these include: religious, scientific, literary, education, animal and child cruelty prevention, and fostering national and international sports.

But, it’s important to note that this list is not exhaustive. For more clarification, it’s best to speak with a professional who can determine if you qualify.

Professionals, like us at A.P Accounting & Tax Services. We are familiar with the laws and regulations of nonprofits and will work with you to ensure yours is exempt.

Maintaining Status

The IRS wants to make sure any profits don’t go directly to private parties (either a corporation or an individual). That’s because any income earned must be used for a charitable purpose. Otherwise, you could lose your exemption status.

A nonprofit also can’t change the business’s income or earn profit from activities unrelated to their initial purpose.

Nonprofits also cannot donate or support political campaigns. However, individual members or employees can support a candidate of their choosing so long as the nonprofit is not involved.

Know What You Might Owe

Nonprofits are exempt from (most) individual and corporate tax. However, this doesn’t mean they won’t owe anything come tax times.

There are certain situations where nonprofits need to make payments. One area is if the entity earned any income from activities unrelated to its initial purpose. In this case, taxes will be owed on any amount earned from unrelated activities.

A nonprofit will also owe if they hire an employee. In this case, the nonprofit will be on the hook to pay any employee-related taxes such as Social Security, Medicare, or Unemployment Tax.

Finally, nonprofits might owe specific state fees or taxes depending on where they are located. Although this is uncommon, it’s best to check with a financial professional that’s familiar with your area.

Form 990

Only religious and political organizations are exempt from filing an IRS form 990, 990EZ, or 990-N.

This means if you’re not under a religious or political designation and your nonprofit earned more than $200,000 per year you will need to file a Form 990 or Form 990EZ.

This form is meant to provide the IRS with a look into a nonprofit’s account activity. This includes things like revenues, liabilities, assets, and expenses.

It is essentially used to hold nonprofits accountable and ensure they are spending money specifically on their primary designation.

Ultimately, having a nonprofit status can be tricky. From the qualifications to the bookkeeping, maintenance, and more; nonprofits need to be on top of their accounts or their exemption could suffer. That’s why we believe that a professional will be better equipped to handle the bookkeeping.

Whether you’d be interested in learning more, or knowing what services would benefit you, give us a call at 407-328-5001.

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