Keeping Nonprofit Organizations in Compliance

Maintaining your 501(c)(3) tax-exempt status

By Elayne Robertson Demby, Attorney and freelance journalist

Having your nonprofit qualify as a tax-exempt charitable organization under section 501(c)(3) confers many tax benefits. Organizations that qualify for 501(c)(3) status can both exclude donations to the organization from income, and allow donors to take corresponding tax deductions on their returns. However, to maintain 501(c)(3) status and those tax benefits, you must:
1. Prepare and file annual returns.
2. Document receipts and expenditures.
3. Meet substantiation and disclosure requirements.
4. Maintain public support.

Know the IRS rules

Completely familiarize yourself with the Internal Revenue Service’s compliance requirements for nonprofit 501(c)(3) organizations.
Try: : Publication 557 [PDF link] the “bible” of tax exempt organizations. [PDF link]IRS FAQs. The IRS Compliance Guide for Tax Exempt 501(c)(3) Organizations You can also contact the IRS’ exempt organizations division at www.irs.gov/eo or (877) 829-5500.

Prepare and file annual returns

501(c)(3) organizations which normally have $25,000 or more in gross receipts must annually file Form 990 or Form 990EZ with Schedules A and B. Form 990EZ is a simplified form for use by organizations with gross receipts normally less than $100,000 and assets under $250,000. Organizations whose annual gross receipts are normally less than $25,000 are exempt from annual filing.
Try: You get a copy of Form 990 [PDF link] or Form 990EZ [PDF link]

Know your filing date

The return due date for Forms 990 and 990EZ is the 15th day of the 5th month after the end of the fiscal year.
Try: If you need extra time, a three-month extension can be had, without showing cause, by filing Form 8868 [PDF link] before the due date. An additional three-month extension can be requested on Form 8868 if reasonable cause why the return cannot be filed by the extended due date is shown.

File employment tax returns

Like other employers, if you pay wages to employees, you must withhold, deposit and pay employment taxes.
Try: Estimate your withholdings with the paycheck calculator at Payroll-Taxes.com. Get help with employee taxes from a payroll service, such as PayChex.

Keep accurate books and records

501(c)(3) organizations must keep books and records to show compliance with tax rules. Identify the sources of all receipts. Document all expenditures. Keep all documentation that supports entries in the books.
Try: Keep track of receipts with bookkeeping ledgers and supplies available at OfficeWorld.com or use an accounting software program, such as QuickBooks or Peachtree.

Comply with 501(c)(3) disclosure requirements

Form 1023 and annual returns along with the organization’s IRS exemption ruling letter must be made available for public inspection and copying, without charge other than reasonable copying expense. Schedule B of the annual return is not required to be disclosed.
Try: Keeping a file of all documents which need to be disclosed readily available. A list of the needed documents can be found in Publication 557 [PDF link] or The IRS Compliance Guide for Tax Exempt 501(c)(3) Organizations [PDF link]

Provide written acknowledgement to donors

Charitable organizations must provide written disclosure to a donor who makes a payment in excess of $75.
Try: Reading the IRS’s pamphlet on substantiation and disclosure requirements [PDF link]. Reviewing the donor substantiation rules and sample acknowledgement letter.

Find out state law requirements

You may have state laws you need to comply with. Many states have requirements for nonprofit organizations, including: • Registering with the Attorney General • Registering and reporting on fundraising activities • Filing an annual report • Reporting any significant transfer of assets out of the state of incorporation
Try: You contact the state tax agency and state attorney general's office to find out the requirements for nonprofit status maintenance in every state you operate in.

501(c)(3) public charities must receive at least one-third of their support from the general public. This means you cannot rely too heavily on donations from specific individuals, or go back every year to the same foundations or corporations for grants. Engaging in any political activity in support of or in opposition to a candidate for public office will result in the loss of 501(c)(3) status. Lobbying is allowed within strict limits.