What You Need to Know About Nonprofit Taxes

Nonprofits, like any other business, need to deal with taxes. Even though a nonp
rofit may be tax-exempt, it still has to file and sometimes, even pay taxes. Let
's not forget that tax compliance can be required at local, country, state and f
ederal levels, so nonprofits cannot just ignore this issue. Below are some impor
tant tax considerations:
1- File the 990-N online
The 990-N is an Internet-based filing available to small organizations, requesti
ng basic information, such as name and address. Nonprofits may lose their tax-ex
empt status after the organization fails to file the 990-N for three years. Note
that the Internet system can be used only for the current year, therefore if yo
u're late, you cannot file the 990-N, and must file the 990 or the 990-EZ in pap
er-form. The eligibility for the online form varies each year, so check with the
IRS website often to see if your organization can use the 990-N online.
2- Sales/Use taxes
Many vendors don't charge nonprofits sales taxes because they are under the wron
g assumption that these organizations don't pay sales/use taxes on purchases. Th
is may seem like a good deal at first, but can create problems later if the vend
or is audited and found that it should have charged taxes. The audit may spread
to the nonprofit, and overall, it's not a pretty picture. This situation happens
often because some states indeed don't charge sales taxes on nonprofit purchase
s, but this is not the case with every state. California, for example, requires
most nonprofits to pay sales/use taxes on many types of revenues.
3- Payroll taxes
Nonprofits must follow the laws like any other business. Failure to pay proper t
axes can create a huge burden on the nonprofit, which may be hit with large pena
lties and interest. The Treasury Inspector General for Tax Administration issued
a report in 2014 regarding nonprofit delinquency and noncompliance with payroll
taxes, so this seems to be a common issue within this sector. Be sure that your
payroll department and/or processing service is aware of all payroll obligation
s, including proper payments for state and federal taxes.
4- Unrelated Business Income Tax
The idea here is to prevent nonprofits to compete unfairly with other firms, pro
viding similar goods and services. Proceeds classified as unrelated are carried
on regularly and are substantially independent to the exempt goal of the organiz
ation. Nonprofits file and pay this tax using form 990-T. However, note that the
IRS provides many exceptions to this rule, giving nonprofits breaks on what is
taxable. Income from volunteer work is one such exception.