How to Keep Your Nonprofit Out of Trouble with the IRS
Nonprofit organizations have business matters to attend to. It is an unavoidable part of running a nonprofit. In addition, they are subject to heavy regulation by the Internal Revenue Service, in large part because of the special treatment they receive under the tax laws. Nonprofits depend on maintaining tax-exempt status under Section 501(c) of the Internal Revenue Code. Straying from the requirements listed in Section 501(c) could threaten your organization’s tax-exempt status and create additional legal problems with the IRS.
Read on for some of the pitfalls to avoid in order to protect your nonprofit from the ire of the IRS and state charity officials, and contact a knowledgeable Illinois nonprofit attorney for help with maintaining tax-exempt status and other nonprofit law issues.
Remember to file annual information returns
Even though nonprofits are tax-exempt, they must still file a tax return of sorts with the IRS each year, known as Form 990, with certain limited exceptions. There are different versions of Form 990 for different organizations depending on their size. In the past, small organizations could skip filing, but under current law, even small organizations must file a 990-N. Form 990-N is relatively easy to file online, thankfully. Larger organizations must file either Form 990, 990-EZ or 990-PF. Organizations that generate income unrelated to their tax-exempt purposes also must file a Form 990-T. Failing to file could land your nonprofit in hot water and put its tax-exempt status at risk.
Avoid political campaign activity
501(c)(3) nonprofits are not permitted to engage in any political campaign activity. Individuals and officials at churches and other nonprofits are permitted to have their own opinions and even espouse those opinions under certain circumstances. However, a nonprofit must not participate in any political campaign or work on behalf of or in opposition to a given candidate for public office. To highlight this prohibition, the IRS posted the following warning to its website, www.irs.gov:
Caution: Section 501(c)(3) organizations are precluded from, and suffer loss of exemption for, engaging in any political campaign on behalf of, or in opposition to, any candidate for public office.
Avoid private benefits or inurement to individuals or for-profit organizations
Nonprofits are distinguished from for-profit companies in that nonprofits work to benefit the public good rather than any particular individual or company. Nonprofits are permitted to pay reasonable salaries to staff but otherwise are prohibited from distributing funds received to individuals for their benefit. Collected funds must go to the organization’s charitable activities. It is especially important that profits and other assets obtained do not go to benefit board members, directors, officers, or other important employees. For example, a nonprofit cannot sell property to a director at below-market value. The nonprofit could lose its tax-exempt status, and the individual would likely face tax penalties.
Limit unrelated business income (UBI)
The nitty-gritty of UBI is complex, but, at a basic level, 501(c)(3) nonprofits must not collect income from activities unrelated to their stated tax-exempt purpose or mission. If the organization earns more than $1,000 UBI in a given year, it must file a Form 990-T (Exempt Organization Business Income Tax Return). If the nonprofit collects too much UBI, its tax-exempt status may be in jeopardy. Periodic but non-regular income from business activities, such as selling merchandise once a year at an event, must be reported as taxable income but should not threaten the organization’s non-profit status.
If your charity, school, church, religious organization, or other non-profit organization faces legal issues in Illinois, get a seasoned and professional opinion on how to proceed by contacting the Chicago non-profit attorneys at MacDonald, Lee & Senechalle in Hoffman Estates at 847-310-0025 and in Des Plaines at 847-298-5030.
Internal Revenue Service, Political Activities of Exempt Organizations (Dec. 13, 2018), https://www.irs.gov/charities-non-profits/political-activities-of-exempt-organizations