Regardless of the size of your nonprofit institution, taxes can be a daunting task. Being prepared early in your operation will set you up for success during tax season or for IRS audits. Like with any other job or project you start, you need to do your research before diving in. These tax exemption tips for nonprofits will help keep you organized and knowledgeable about key ins-and-outs. They may even help you gain volunteers and track the funds you collect.
Applying for Tax Exemption
Nonprofits do not need to apply for tax exemption status, but doing so will save taxes on the organization’s income and helps them to raise money more easily. Certain states also allow nonprofits to be exempt from some types of income, sales, and property taxes. To file for tax exemption status, you will need the IRS Publication 557. The most common form of nonprofit status is 501(c)(3) for charitable organizations.
Determine if Your Nonprofit Needs to File Taxes
While many nonprofits qualify for tax exemption, most of them still need to file taxes. However, some do not need to submit a Form 990, like churches and other religious organizations. Federal and state nonprofit groups can also be exempt from filing annual taxes. If your organization is a subsidiary of a larger nonprofit institution, you likely don’t have to file a tax return, as the head institute already files the necessary forms. Consulting an accountant and finding out for sure what your requirements are will save you from some headaches down the road.
Keep Thorough Records of Donations and Expenses
If you operate a nonprofit, the fact is that you can be audited by the IRS at any time. When the IRS wants to audit your nonprofit, you’ll need detailed records of every expense, donation, and how money is moving through the institution. Do not forget to include any money raised through crowdfunding, too, as these funds are still subject to donation tax laws. It is best to be very organized when keeping records and always keep backup records in case the first digital files get destroyed. The best way to keep track of everything is to use accounting software and donation management software.
If you don’t keep detailed accounts of your revenue, it could mean the end of your nonprofit status. It’s also important to make sure to keep those records secure to keep your donors’ identities private and protect them from cybercriminals.
Use a Payroll Service
Another tip for staying organized involves keeping detailed track of payroll. As a new nonprofit organization, a payroll service is strongly recommended. Payroll specialists will work with your accountant and tax advisor to ensure the proper withholdings for various types of nonprofit taxes are being saved. A payroll specialist will also provide the necessary reports needed for filing your nonprofit’s taxes.
While not every donation needs to be acknowledged, any donation of $250 or more should receive a personalized thank you letter and a receipt. The letter should assure them that your organization is tax-exempt and state whether a gift was given in exchange for the donation. It should also include the donation amount and the date that it was received. If the donation comes in the form of a gift, there are certain IRS rules that must be followed so that “quid pro quo” laws and regulations are not violated.
Let Your Volunteers Know About Deductions
Gaining volunteers to help with your nonprofit institution can be tough and there are many people who have no idea that they can deduct expenses accrued while volunteering. These tax deductions for nonprofits make volunteering more appealing and can save your volunteers money. Some of the common things they can deduct include:
- Gas expenses
- Oil changes
- Mileage, usually at the rate of 14 cents per mile when working and traveling for the nonprofit
- Travel expenses including airfare, food while traveling, and accommodations
- Office supplies
- Phone usage
Include some information about these tax deductions in your marketing efforts to recruit volunteers to gain an edge in attracting the extra workforce you need to operate on a greater scale.
Always Use a Professional Tax Accountant
Using an experienced professional accountant will help make sure you get the most out of the tax exemption rules for nonprofits, which saves you money and time. Your accountant will have plenty of knowledge about what needs to be done to maintain your nonprofit status and keep you in business.
Submit Nonprofit Taxes On Time
Contact an accountant to get your nonprofit institution’s taxes submitted. Your Form 990 must be submitted by the 15th day of the fifth month following the end of the group’s tax year. For example, if you choose to end your tax year on May 3, your taxes will be due on September 15. If you are late to submit your taxes three years in a row, your tax exemption status will be revoked. So make sure you are prepared early!
How Maxwell Locke & Ritter Can Help
At Maxwell Locke & Ritter, our team members have extensive experience helping nonprofits with their taxes and auditing needs. We’ve got you covered with crucial advice that will maximize your use of funds and optimize how your organization operates. Our team approach covers all aspects of the nonprofit services you need for taxes, audit compliance, and year-round operation.