Nonprofit organizations play an important role in society. Federal, state and local governments do their best to balance their income by providing services to citizens. Despite the best efforts of all three levels of government, there can never be enough money to supply the needs of every citizen, especially as it pertains to health and social services. Through the efforts of dedicated volunteers and the donations of caring and thoughtful donors, nonprofit organizations are able to fill many of the gaps in services that people need that governments aren’t able to provide.
In exchange for the services they provide, state and federal governments give tax breaks to nonprofits to allow them to continue doing the good work that they do. Nonprofit organizations are legally required to have a board of directors. Even though nonprofit organizations don’t operate for a profit, their board directors have all the same responsibilities and liabilities as major corporations. Part of the nonprofit requirement is that boards should know what the laws, rules and regulations are regarding nonprofit organizations and comply with them.
Board directors who make mistakes because they weren’t aware of their fiduciary responsibilities won’t be excused from the consequences that ensue as a result of their mistakes. That’s a very good reason to start up a nonprofit organization using board management software by BoardEffect.
Understanding Taxes and Rules for Nonprofit Organizations
Nonprofits qualify for state and federal exemptions for income tax and property tax. In some states, nonprofits have to file for state and federal exemptions separately. In others, once the state approves the nonprofit, the organization automatically becomes federally tax exempt as well. Nonprofits must abide by the laws of the state in which they’re established.
Sales tax works a bit differently for nonprofits. In most cases, the sales tax is waived for transactions that relate to the organization’s charitable mission. For example, if a nonprofit organization sells T-shirts as a fundraiser, they would not have to pay sales tax because the sales support the charity. Depending on the nature and sales volume of some sales activities, nonprofits may be required to pay sales taxes. In some states, if a nonprofit vendor sells items or charges for services rendered, they may have to collect payments just like any other vendor.
Nonprofits that have revenues in excess of $25,000 per year must file an annual report on Form 990 with the IRS. Form 990-EZ is the shorter version of the form and it is appropriate for small tax-exempt nonprofit organizations that have total assets of less than $25,000 by the end of the year. IRS Form 990 asks for information on the nonprofit’s income, expenses and staff salaries that are over $50,000. Individual states may have their own requirements and forms.
Nonprofit requirements mean that nonprofits still have to pay employment taxes for their paid workers just like other employers. Also, nonprofits may have to pay unrelated business income tax, which is regular income from a trade or business that isn’t materially related to the charitable purpose. A nonprofit organization that receives $1,000 or more of gross income from an unrelated business must file Form 990-T and pay the required tax.
Nonprofit organizations have a couple of other restrictions. They aren’t allowed to participate in any kind of significant lobbying and they’re not allowed to endorse candidates in political campaigns.
Making an Application to the IRS for Nonprofit Status
When making an application for nonprofit status, nonprofit founders must request an employer identification number (EIN). They must also apply to be recognized as a tax-exempt organization by filing Form 1023 as a charitable organization or Form 1024 as an Other Tax-Exempt Organization and pay the necessary filing fees.
The IRS has designated various tax codes for different types of nonprofit organizations. The most common type of nonprofit falls under section 501(c)(3), which covers a broad range of nonprofits including charities, educational organizations, health organizations, scientific organizations, religious organizations and literary work.
After the founding members file all the proper paperwork and pay the registration fees, they need to form a board of directors. Each state has rules about the minimum number of people that can make up the board. In a few cases, only one board member is required. In most states, the minimum is three, which makes sense for voting purposes.
How to Dissolve a Nonprofit Organization
Just as there are rules for forming a nonprofit organization, there are also nonprofit requirements for dissolving one. Nonprofits may run into various situations in which they need to dissolve. They may lack the finances or the volunteers to keep going, or there may be a lack of interest in keeping the entity running.
Because of its tax-exempt status, dissolving a nonprofit organization is different from dissolving a for-profit company. When a nonprofit dissolves, it can’t simply distribute its assets to the board or to its members, because that would violate the organization’s nonprofit status. Most of the time, a non-profit will merge with another nonprofit. Nonprofits that are going through a dissolution must transfer their assets to a similar nonprofit organization. The IRS requires nonprofit boards to complete certain steps to dissolve or shut down the group. When a nonprofit isn’t merging with another group and still wants to terminate their status, they need to file a final form by the 15th day of the fifth month after the end of the time frame that their tax return is due.
The nonprofit must officially vote to close down the nonprofit. If it has no voting members, the nonprofit board may vote to close and terminate the nonprofit’s business. The board must also file Form 990 with the IRS, which dissolves the organization for tax purposes. Without that form, the IRS may consider the business operational. There are three different Form 990s and they pertain to the organization’s gross earnings for the fiscal year in which you’re terminating the organization. The board should also let the IRS know that this will be their final tax return by checking the box labeled terminated, liquidated, dissolved or distributed net assets. If the nonprofit is merging with another organization, enter the other nonprofit in the area where indicated. The IRS will need a certified copy of your articles of dissolution and plans to liquidate or merge.
Just to be on the safe side, it’s always a good idea to check with your state Attorney General’s office to make sure that they have the proper documents to dissolve the nonprofit. Some states may require supplemental documents and certified copies of the dissolution documents. The time frame for dissolving a nonprofit is 30 to 60 days.