How to Prepare a Nonprofit Tax Return:
What You Need to Know
Do Nonprofit Organizations File Tax Returns?
Yes! Nonprofit organizations that have been granted tax-exemption by the IRS are required to file an IRS Form 990, annual information return. Nonprofit organizations is are required to ‘justify’ its their tax-exempt status. In other words, the annual tax return of a 501(c)(3) organization proves to the IRS that the nonprofit is living up to its charitable purpose.
What is the IRS Form 990?
IRS Form 990 is the annual informational tax return filed by tax-exempt organizations that details financial information, including statements of revenue and expenses and balance sheets. The Form 990 is an annual compliance report that details:
- Information on governance, decisions made, and written policies that demonstrate accountability and transparency.
- Adherence to best practices and its tax-exempt purpose.
- Adherence to applicable federal tax law, from payroll and information reporting to unrelated business income taxes.
What Kind of Tax Return Does a Nonprofit File?
There are several types of the IRS Form 990s, which are determined by the financial standing of a nonprofit. Nonprofit organizations are required to file the form 990 based on their assets, gross receipts, and public charity status.
- Tax-exempt organizations (other than private foundations) with gross receipts that are equal or greater than $200,000 or have total assets of $500,000 or more are required to file Form 990, Return of Organization Exempt from Income Tax.
- Organizations with gross receipts less than $200,000 and total assets less than $500,000 can file Form 990-EZ, Short Form Return of Organization Exempt from Income Tax.
- Organizations with gross receipts of at most $50,000 are not required to file either Form 990 or 990-EZ but are required to file, IRS 990-N Electronic Notice (e-Postcard).
- If the organization is a private foundation rather than a public charity, it is required to file an IRS Form 990-PF regardless of its revenue.
What Happens if Your Tax Return or Form 990 has Incorrect or Missing Information?
It is not uncommon for nonprofit organizations to file the wrong type of Form 990. All too often, Form 990s might be missing information, or even an entire schedule. When this happens, the IRS generally sends back your information return along with one of the following letters requesting you submit the required information:
- IRS Letter 2694C (Return Form 990 due to missing information)
- IRS Letter 2695C (Return Form 990-EZ due to missing information)
- IRS Letter 2696C (Mission Information Request to Process EO Return)
If your organization fails to file its required information return for 3 consecutive years, the IRS will automatically revoke your tax-exempt status and place your organization on its Auto-Revocation List. Revocation means that your nonprofit organization will now be liable to pay federal income tax and often state income tax on annual revenue. In addition, your donors will no longer be able to make tax-deductible contributions.
How the IRS Assesses Penalties for Tax-Exempt Organizations
Generally, tax-exempt organizations under section 501(a) of the Internal Revenue Code (which includes 501(c)(3) nonprofits) are required to file annual information returns. Failure to file the IRS Form 990, filing after the due date, or failing to file an extension of time to file, could result in the IRS assessing daily penalties. The penalty assessed largely depends on the organization’s annual gross receipts.The maximum penalty the IRS can assess if an organization fails to file its return is the lesser of either 5% of the organization’s gross receipts or $10,000 for the year. For nonprofit organizations with over a million dollars in gross receipts per annum, the penalty is $100 per day with a maximum of $50,000..Penalties will also be assessed if a tax-exempt organization files on time but provides inaccurate information or omits any required information
To avoid these penalties, your nonprofit must comply with Form 990 return due dates, which vary based on your organization’s accounting periods or tax timetable:
What Is the Due Date of IRS Form 990?
Form 990 due dates depend on the specific tax calendar that your nonprofit follows. This table outlines different due dates based on when your nonprofit's tax year ends:
|Ending Date of Tax Year||Initial Return Due Date||Extended Due Date|
|December 31||May 15||November 15|
|November 30||April 15||October 15|
|October 31||March 15||September 15|
|September 30||February 15||August 15|
|August 31||January 15||July 15|
|July 31||December 15||June 15|
|June 30||November 15||May 15|
|May 31||October 15||April 15|
|April 30||September 15||March 15|
|March 31||August 15||February 15|
|February 28/29||July 15||January 15|
|January 31||June 15||December 15|
Your Form 990 is also often required as part of the state-level charitable solicitation registration process. The state charitable registration due dates can be even earlier than the IRS Form 990 filing due dates.
Dissecting the 12 Parts of IRS Form 990Form 990 is divided into 12 parts as follows:
- Part I: This is a summary of your organization. You are required to input general information about your organization, documenting your organization’s mission, activities and governance. Part I concludes with net assets or fund balances which is simply your annual revenue minus expenses.
- Part II: This is the signature block wherein you attest under penalty of perjury that the information input is true, correct, and complete to the best of your knowledge.
- Part III: This is the statement of program service accomplishments. You are asked to briefly describe your organization’s mission statement and your organization’s service accomplishments for each of its three largest program services, as measured by expenses.
- Part IV: Checklist of required schedules that must be completed.
- Part V: Checklist of statements regarding other IRS filings and tax compliance.
- Part VI: Checklist of Governance, management, and disclosure. This section asks for information on your organization’s governing body. For example, you must indicate if your organization made any significant changes to its governing documents, the number of voting members, and so on. This section also requests information about policies not required by the Internal Revenue Code, such as if your organization has local chapters, branches, or affiliates.
- Part VII: List of officers, directors, trustees, independent contractors, and key employees. Employees and up to five independent contractors who received reportable compensation in excess of $100,000 must be reported.
- Part VIII: Statement of revenue which accounts for revenue received from related or exempt funds and unrelated business income.
- Part IX: Statement of functional expenses which is simply a reporting of all expenses incurred, from benefits paid to members, depreciation, depletion, and amortization, to insurance, and so on.
- Part X: The organization’s balance sheet which details net assets or fund balances.
- Part XI: Reconciliation of the net assets of the organization or affirming consistency, completion, and accuracy of all accounts.
- Part XII: Financial statements and reporting. This section explains the accounting method used if the organization’s financial statements were compiled or reviewed. If an independent audit was conducted, especially in cases when required.
Detailed reporting requirements are a function of what boxes are checked as applicable to the 990. The boxes checked ‘YES’ trigger additional forms, disclosures, and specific schedules as part of the reporting requirement.
How Do I File A Nonprofit Tax Return?
Determine what Version of Form 990 Applies to your Nonprofit Organization.
Most nonprofits exempt under the IRC section 501(a) are required to file either Form 990 or 990-EZ, or submit an annual electronic notice – form 990-N. The annual gross receipts and total assets determine what form your organization is required to file.
Accurately Complete Your Form 990
Complete the appropriate form, along with any accompanying attachments. Form 990s come with detailed instructions, so be sure you read and understand them before filling out required information.
Electronically File Your Form 990 on Time
The Taxpayer First Act, enacted on July 1, 2019, now mandates tax exempt organizations to electronically file their form 990s and other related forms, including:
- Forms 990, Return of Organization Exempt from income tax.
- Form 990-EZ, Short Form Return of Organization Exempt from income tax.
- Form 990-T, Exempt Organization Business Income Tax Return.
- Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code.
- 990-PF, Return of Private Foundation.
- Form 8872, Political Organization Report of Contributions and Expenditures.
- Form 1065 or U.S. Return of Partnership Income.
How a Labyrinth Partner Can Help You Prepare A Nonprofit Tax Return
Your Form 990 is a very important public document that, when filed correctly and on time, can attract donors, funders and corporate partners to help you fulfill your mission. It is important that you entrust the filing of your Form 990 to a qualified specialist. While Labyrinth does not provide this service, we have network of partners who can help you with the preparation and filing of your IRS Form 990. Contact us now to be connected with one of our partners.
- Your organization can use its Form 990 to demonstrate fiduciary responsibility. Prospective donors want to know that a healthy percentage of their donations are spent directly on furthering the organization’s mission.
- Publicly accessible 990s also demonstrate your transparency and show that you are complying with all applicable laws.
- Your Form 990 can also showcase good governance and ethics by providing information on how executive compensation is determined and what conflict of interest policies you have in place.
Most importantly, you can use your Form 990 to showcase your organization’s accomplishments and impact.
Find A Reliable Nonprofit Accountant:
How Labyrinth Can Help You Prepare A Nonprofit Tax Return
Your Form 990 is a very important public document that, when filed correctly and on time, can attract donors, funders and corporate partners to help you fulfill your mission. It is important that you entrust the filing of your Form 990 to a qualified specialist.
While Labyrinth does not provide this service, we have network of partners who can help you with the preparation and filing of your IRS Form 990. Contact us now to be connected with one of our partners.