Nonprofit Tax-Exempt Status

Maintaining tax-exempt status under 501(c)(3) requires compliance with IRS guidelines, public support tests, and regular filings like Form 990. This page will cover the critical areas where nonprofits face challenges, including unrelated business income (UBI), excess benefit transactions, and avoiding political campaign activities. We’ll also detail how to address potential IRS red flags, and provide strategies for keeping your organization’s tax-exempt status intact, even as your mission grows and evolves.  

How to Maintain Nonprofit Tax-Exempt Status

Maintaining your nonprofit’s 501(c)(3) tax-exempt status is critical to the success and longevity of your organization. Losing this status can result in significant tax liabilities, loss of public trust, and even the dissolution of your organization. Our CPA team specializes in guiding nonprofits through the complex regulatory landscape, ensuring compliance with IRS regulations and helping you safeguard your tax-exempt status.

Why Maintaining Tax-Exempt Status is Critical

Tax-exempt status allows your nonprofit to operate free from federal income tax, provides eligibility for grant funding, and enhances your ability to attract donations that are tax-deductible for donors. Losing this status can have serious financial and reputational consequences, so it’s essential to understand and comply with all IRS regulations governing 501(c)(3) organizations.

Key Steps to Maintaining Your Tax-Exempt Status

Here are the essential steps nonprofits need to take to maintain compliance and protect their tax-exempt status:

• Filing Form 990 Annually: Nonprofits must file Form 990 or 990-EZ with the IRS every year. This form provides detailed financial information and is publicly available, so accuracy is critical for transparency and compliance.
• Avoiding Unrelated Business Income (UBI): If your nonprofit generates income from activities unrelated to its primary mission, it may be subject to tax and put your tax-exempt status at risk. We help you navigate UBI rules to avoid penalties and compliance issues.
• Maintaining Public Support: Public charities must meet the IRS’s public support test, ensuring that a significant portion of revenue comes from public sources like donations and grants. Falling below this threshold could result in losing public charity status and reclassification as a private foundation.
• Staying Clear of Political Campaign Activities: 501(c)(3) organizations are prohibited from engaging in political campaign activities. Even indirect participation in political campaigns can lead to penalties or revocation of your tax-exempt status.
• Monitoring Excess Benefit Transactions: Transactions that provide excessive benefits to insiders (such as board members or key employees) can trigger IRS penalties. We help you establish clear governance policies to avoid conflicts of interest and protect your nonprofit’s integrity.

Common Risks to Tax-Exempt Status

Nonprofits face several risks that could lead to the loss of tax-exempt status. Understanding and mitigating these risks is essential to maintaining compliance:

• Failure to File Form 990: Failure to file for three consecutive years automatically results in the revocation of your tax-exempt status. We provide full support to ensure timely and accurate filings.
• Excessive Unrelated Business Income: If UBI becomes a substantial part of your revenue, it could jeopardize your tax-exempt status. We help identify allowable activities and structure revenue to minimize this risk.
• Private Inurement and Excess Benefit Transactions: Providing excessive compensation or benefits to insiders can lead to fines and the loss of tax-exempt status. We guide nonprofits on how to properly document and monitor insider transactions.
• Failure to Meet Public Support Test: Public charities must receive at least one-third of their support from public sources. Falling below this threshold could reclassify your organization as a private foundation, subjecting it to additional tax rules.

How We Help Nonprofits Protect Their Tax-Exempt Status

Our CPA team works closely with nonprofit organizations to ensure they remain compliant with IRS regulations and maintain their tax-exempt status. From annual filings to UBI management, we provide comprehensive tax services tailored to nonprofits. Here’s how we help:

• Form 990 Preparation & Filing: We handle the entire process of preparing and filing Form 990, ensuring your financials are accurate, transparent, and in full compliance with IRS requirements.
• UBI Strategy & Management: We help nonprofits minimize their exposure to UBI, structuring their activities to maximize revenue without jeopardizing tax-exempt status.
• Governance & Compliance Consulting: We provide ongoing guidance to ensure your board and key staff understand and adhere to the rules governing 501(c)(3) organizations, reducing the risk of penalties or loss of status.

Frequently Asked Questions About Tax-Exempt Status

• What happens if my nonprofit loses its tax-exempt status? Losing tax-exempt status means your nonprofit will be subject to federal income tax, and donations may no longer be tax-deductible for your donors. It also significantly impacts your credibility with funders and the public.
• How can my nonprofit reinstate tax-exempt status if it’s revoked? Nonprofits can apply for reinstatement by filing Form 1023 and paying the necessary fees, but the process can be complex and time-consuming. We guide nonprofits through the reinstatement process to ensure the best chances of success.
• How can nonprofits avoid unrelated business income tax (UBIT)? UBIT applies to income from activities that are not substantially related to your nonprofit’s mission. Structuring activities to minimize UBI, such as separating for-profit ventures, can help avoid UBIT. We offer strategies to manage and minimize this tax risk.

Why Work with Us for Nonprofit Tax Compliance?

Maintaining tax-exempt status requires careful oversight and proactive management. Our experienced CPA team helps nonprofits navigate the complexities of IRS regulations, ensuring your organization remains compliant, tax-exempt, and eligible for the funding it needs to thrive.

Contact us today to learn more about our specialized nonprofit tax services and how we can help your organization maintain its tax-exempt status.