How to Prepare a Nonprofit Tax Return

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. You might wonder why, given that such organizations are exempt from paying taxes anyway. To put it in layman’s terms – your nonprofit organization is required to ‘justify’ its 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.

Unfortunately, there are always some who might take advantage of a nonprofit’s tax-exempt status for personal financial gain. For example, an individual could create a shell company and submit invoices to obtain payments for services not rendered or deliver goods or services marked-up excessively. It is for reasons such as these that larger nonprofits, and nonprofits that are recipients of grants, are required to have an independent accountant perform an audit.

What is the IRS Form 990?

IRS Form 990 is the annual information return or tax return filed by tax-exempt organizations with the IRS that details financial information, including statements of revenue and expenses and balance sheets. The Form 990 is in fact an annual compliance report of your organization to the IRS that documents:

  • Information on governance, documentation of decisions made, and written policies to demonstrate accountability and transparency.
  • That your tax-exempt organization is adhering to best practices and stays within the confines of its tax-exempt purpose.
  • That your organization remained compliant with applicable federal tax law, from payroll and information reporting, to unrelated business income taxes, and so on.
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 penalties of up to $20 or more per day. The penalty assessed largely depends on annual gross receipts, for each date the information return is overdue. It is worth noting that penalties will also be assessed if a tax-exempt organization files on time but files inaccurate information or omits any required information. Your information return is considered filed only if it is complete and accurate.

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 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.

To ensure that your tax returns are filed correctly and on time, the nonprofit CPAs at Labyrinth, Inc. keep track of due dates on your behalf, file extensions when necessary, and triple-check every tax return to account for errors before filing.

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:

  • 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 has received one of these letters, contact us immediately. Our nonprofit tax filing experts here at Labyrinth will assist you in providing a corrected return, along with your explanation detailing why your organization failed to submit the required information. Once you receive one of these letters from the IRS, you have 10 days from the date of the letter to correct your mistake.

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.

If your tax-exempt status has been revoked, we will help reinstate it on your behalf. If your organization has reasonable cause for failure to file in a timely manner, we will also request an abatement of penalties assessed.

How the IRS Assesses Penalties for Tax-Exempt Organizations

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.

To avoid these penalties, your nonprofit must remain aware of 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 YearInitial Return Due DateExtended Due Date
December 31May 15November 15
November 30April 15October 15
October 31March 15September 15
September 30February 15August 15
August 31January 15July 15
July 31December 15June 15
June 30November 15May 15
May 31October 15April 15
April 30September 15March 15
March 31August 15February 15
February 28/29July 15January 15
January 31June 15December 15
 

If you are ever unsure of your nonprofit’s exact due dates for tax returns, you can research on the IRS website or reach out to nonprofit compliance experts for help. Your Form 990 is also often required as part of the state-level charitable solicitation registration process. The state due dates can be even earlier than the IRS Form 990 filing due dates.

Dissecting the 12 Parts of IRS Form 990

Form 990 is divided into 12 parts as follows:
  1. 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.
  2. 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.
  3. 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.
  4. Part IV: Checklist of required schedules that must be completed.
  5. Part V: Checklist of statements regarding other IRS filings and tax compliance.
  6. 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.
  7. 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.
  8. Part VIII: Statement of revenue which accounts for revenue received from related or exempt funds and unrelated business income.
  9. 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.
  10. Part X: The organization’s balance sheet which details net assets or fund balances.
  11. Part XI: Reconciliation of the net assets of the organization or affirming consistency, completion, and accuracy of all accounts.
  12. 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. The most common schedule is, Schedule O, required of all organizations that file Form 990 and certain organizations that file 990-EZ. These organizations are required to complete Part VI, lines 11b and 19.

Experienced Form 990 Filing

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 should determine what form your organization is required to file.

Accurately Complete Your Form 990

Given the importance of your Form 990, we advise you to leave it to experts. However, if you intend to complete it internally, make sure you fill out all applicable information along with any accompanying attachments. Form 990s come with detailed instructions, so be sure you read and understand them before filling out required information. Errors can be costly, so when you are done, have at least two other people look it over.

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. This cover,

  • 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.
Tax exempt organizations can electronically file their tax return directly with the IRS by clicking here.

How Your Organization Can Use Its Form 990 To Attract Donors

Your Form 990 is a public document. Once filed, the IRS makes this available to the public. Many organizations also publish theirs on their website as a public relations tool. In fact, your Form 990 can serve as the face of your organization, and be used to attract more donors.

  • 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 on directly on furthering the organization’s mission.
  • Publicly accessible 990s also demonstrates 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 explaining conflict of interest policies you have in place.

Most importantly, you can use your Form 990 to showcase your organization’s accomplishments and plans for the forthcoming year.

Hire A Reliable Nonprofit Accountant:

How Labyrinth Can Help You Prepare A Nonprofit Tax Return

Your Form 990 is a very important document that, when filed correctly and on time, has many benefits. It is important that you entrust the filing of your Form 990 to experts.

With over 30 years of experience helping nonprofit organizations just like yours, you can count on Labyrinth’s experience and professionalism to get it right. We keep up to date with the tax code on your behalf and manage the preparation and filing of your Form 990 from start to finish. Call us today and find out for yourself why for decades, thousands of nonprofit organizations have entrusted us with handling their Form 990 filings. Ask us about our nonprofit bookkeeping services. Leave everything to us, we have you covered!