With the end of the calendar year comes a new tax season. As a nonprofit, the last year has consisted of great fundraising campaigns, new projects, and new growth. Throughout it all, you probably weren’t thinking about where to categorize data and how new fundraising will impact your tax forms.
You’re not alone! Many nonprofits are so focused on the acquisition of funds during their fundraising campaigns that they forget there’s a step afterward – filing your 990 with the IRS.
When tax season begins, many nonprofit staff members are left to sort through complicated forms, long-winded instructions, and disorganized data. Even worse? According to Jitasa’s nonprofit bookkeeping article, many times the person left to sort through this data tends to be the nonprofit executive.
When your executive staff have their hands tied with tax season, the numbers and data keep them from their primary purpose – strategizing to advance the organization’s mission.
As you can see, tax season for an ill-prepared nonprofit is an unproductive affair. That’s why we’ve comprised some tips to help your nonprofit glide smoothly through tax season. These tips include:
- Make sure you have the right tax season elements in mind.
- Research any changes to the tax system and how they’ll impact you.
- Create an organizational structure for important 501(c)(3) forms.
- Don’t be afraid to ask for help.
A prepared nonprofit will not only spend less time on their tax season, but they’ll also see the benefits of it. That’s right, there are some up-sides to filing irritating tax forms every year. But we’ll touch on that in a later section. Now, let’s dive into the tax forms and systems that you need to concern yourself with.
1. Make sure you have the right tax season elements in mind.
If you’re new to the nonprofit world, you may be wondering, “Wait, nonprofits don’t pay taxes. Why do they need to concern themselves with tax at all?” Well, you’re right that registered 501(c)(3) organizations (as well as some other classifications of nonprofits) don’t pay taxes. However, this doesn’t mean they’re cut off from the stresses of the season.
Instead of paying taxes, nonprofits are required to file an annual Form 990 to maintain their tax-exempt status with the IRS.
The government doesn’t necessarily like that not everyone pays taxes. When organizations are tax-exempt, they don’t receive revenue from those nonprofits. However, they’re willing to allow nonprofits to remain exempt if they prove themselves to be a reliable, honest institution (which is the purpose of the 990 Form).
Your nonprofit will need to file one of four primary 990s:
- If your gross receipts are less than $50,000, you’ll file the 990-N.
- If your gross receipts are between $50,000 and $200,000 with less than $500,000 in total assets, you’ll file either the standard 990 or the 990-EZ.
- If your gross receipts are greater than $200,000 or have total assets greater than $500,000, you’ll file the standard 990.
- If your nonprofit is a private foundation, you’ll file the 990-PF.
This form is due on the 15th day of the 5th month after the end of your nonprofit’s fiscal year. For organizations working on the calendar fiscal year, this means your 990 is due on May 15th.
The 990 is the primary concern of nonprofits when it comes to tax season, but there are a couple of other things to keep in mind too! Consider the following:
- Your donor’s taxes. When donors give to your nonprofit, they can record that contribution on their own tax forms to receive a deduction. Therefore, when you send a donation receipt to your donors, make sure you have all of the relevant tax information related to the contribution. Donors expect it as a part of their giving process.
- Payroll taxes. Payroll at nonprofits works almost the exact same as payroll at for-profit organizations. You must withhold Social Security, Medicare, federal and state taxes from payroll. Nonprofits must also follow state compensation laws and provide required benefits to their employees.
This may sound rather confusing to many nonprofit professionals. After all, you got into the industry to help people, not to fill out tedious paperwork.
There’s no shame in asking for help to figure out your nonprofit’s tax form situation. In fact, we highly recommend it. Professionals, whether outsourced or hired internally, who can look over your financial data to make sure you’re audit and 990-ready are bound to help your nonprofit succeed financially.
2. Research any changes to the tax system and how they’ll impact you.
Changes to the country’s tax system aren’t usually the ground-breaking news that you expect from your local cable news network.
However, it is important to pay attention and even do additional research. Here’s why: Even the smallest changes to the tax code can result in a major change in processes for nonprofit organizations. This isn’t just theoretical, either. It happened just this year!
The Taxpayer First Act was signed into law on July 1, 2019, and does impact nonprofit organizations. Some of the changes that nonprofits should be aware of include:
- All 990s will be electronic. Previously, it was optional to file electronically for all 990s except the 990-N. Now, everyone will e-file their forms. This allows the IRS to release the completed 990s to the public earlier (that’s right, they’re public record).
- The IRS will notify you if you don’t file for two consecutive years. After three consecutive years of failing to file, the IRS revokes your nonprofit’s tax-exempt status. Just remember to file your forms annually and you’ll never need to worry about it.
Tax changes have an impact on your tax season, but also on your donors. For instance, if a change in the system disincentivizes giving from top donors, your nonprofit is more likely to see a dip in donation revenue.
Pay attention to changes in the tax system to make sure your nonprofit is up-to-date about the latest news in organization financials and financial forms. Then, you can conduct personal research or ask an accountant if any of these changes will impact your specific industry.
3. Create an organizational structure for your 501(c)(3) forms.
Nonprofits fill out a lot of financial documents over the years. Our recommendation is to keep records. It’s important to have records of all forms on file in case you need them in the future. Simply making a copy of them or uploading them to your computer where you can find them will help you keep track.
In addition to your annual 990, some of these forms you need to consider include:
- The Articles of Incorporation. When you form a 501(c)(3) organization, you’ll need to file this form through the Secretary of State in the state where the nonprofit is located. This checklist provides more context about the forms associated with starting a nonprofit.
- Form 1023-EZ. This is the typical form nonprofits must file in order to receive federal tax exemptions. It must be filed within 27 months of your organization’s incorporation.
- Form 5768. If your organization participates in any political or lobbying activities, you’ll need to file the Form 5768.
Just tracking the relevant nonprofit forms doesn’t make an effective organizational structure for your nonprofit.
You should also make sure your bookkeeping processes are up-to-date and that you have effective internal controls set up to identify any misuse or mistakes in records. Effectively track restricted vs. unrestricted funds and make sure anyone on your team handling finances (or outside accountants) will help you run reports and keep all data in an easy-to-use system.
Your nonprofit may find that this process helps with more than just your tax season. A better handle on your finances will help your nonprofit be more transparent with donors and improve relations with them. Remember us saying that there are advantages to a well-planned tax season? Well, this is it! Being open and transparent is the first remedy for addressing the donor engagement gap.
4. Don’t be afraid to ask for help.
We’ve said it before, taxes can seem really complicated. This is especially true for nonprofit professionals who enter the field in order to help people, not to do finances. There is no shame in asking for help.
The best way to approach your financial strategy is to hire a professional to help your organization. With so many consultants, outsourcing resources, and other organizations ready to help your nonprofit take on the world, why wouldn’t you invest in them?
Just as the right digital agency will help your nonprofit turn interest into action, the right financial partner will provide strategies to help your bottom line.
First, you should determine your needs and your budget. In general, most small to mid-sized nonprofits find it best to outsource finances to a bookkeeping and accounting specialized firm. This reduces the costs of hiring a professional in-house (as larger organizations may choose to do) while ensuring you still have a team of people behind you at all times. An outsourced team can help you:
- Keep accurate financial records.
- Decipher which forms you need.
- File the necessary tax forms.
- Budget for the future.
- Process payroll.
- Improve financial transparency with donors.
It takes a wise nonprofit leader to know when you need help with something, especially with something as complicated as tax season. With all of the resources available to help you accomplish all of your financial needs, there’s no reason for you to struggle too much with nonprofit taxes.
With a new fiscal year comes tax season to record data from the previous year. Make sure your nonprofit is ready with these four tips. Good luck!