Making Sure Your Nonprofit Keeps Its 501(c)(3) Status at the End of the Year

Making Sure Your Nonprofit Keeps Its 501(c)(3) Status at the End of the YearThe end of the year approaches, and with it comes tax preparation. Along with many other companies, nonprofits need to get their information gathered to prepare for filing taxes. Now, you may be wondering “aren’t nonprofits tax exempt?” Yes, most try to qualify for tax exemption — known as 501(c)(3) status — which goes through a different process than a typical tax return.

As a nonprofit, you rely on your tax-exempt status to manage your operations each year. You need all of the money possible to further your cause and support those in need. Not paying certain taxes gives you more money to put back into your budget and continue serving those you care about. Here are some of the requirements for you to keep your 501(c)(3) status at the end of the year.

What is Tax Exempt Status for Nonprofits?

Having a tax-exempt status means that you don’t have to pay income tax. This gives you extra funds with which to further your cause. You do have to maintain a 501(c)(3) status and also meet all of the requirements in order to be tax exempt.

There are certain requirements your nonprofit needs to make to maintain your tax-exempt status. Make sure you meet all of them before the end of the year.

Tax returns for nonprofits are still required. You’ll have to fill out a 990 form. Not filing this form can result in penalties or in getting your tax-exempt status revoked. Being unable to maintain this status can cause your nonprofit to fail, so it’s best to keep it maintained.

Are All Nonprofits Tax Exempt?

Having a nonprofit status does not automatically mean that you don’t have to pay taxes. There are specific requirements for meeting this status, and not all organizations qualify. Others fail to fill out the paperwork required to get tax exempt.

Requirements for Keeping 501(c)(3) Status

There are several requirements nonprofits have to meet to keep their 501(c)(3) status. If they are not met, these organizations may not qualify for tax exemption.

Continue Your Charitable Mission

Charitable missions covered under code section 501(c)(3) include

  • Charitable
  • Educational
  • Fostering amateur sports competitions
  • Literary
  • Preventing cruelty from coming to animals or children
  • Religious
  • Scientific
  • Testing for public safety

Charitable here refers to any of the following efforts.

  • Advancing education, religion, or science
  • Combating deterioration of the community
  • Combating juvenile delinquency
  • Defending civil and human rights
  • Eliminating discrimination or prejudice
  • Lessening governmental burden
  • Lessening tensions in neighborhoods
  • Maintaining or creating public infrastructure
  • Providing relief for the distressed, poor, or underprivileged

Remain Politically Neutral

Nonprofits cannot try to influence election outcomes. Trying to get voters to act a certain way or changing legislation is against requirements. Organizations cannot campaign for or against any political candidate, or they will lose their tax-exempt status.

Some nonprofits can try to influence legislation if it is relevant to the mission they advocate for, but this cannot be a substantial part of their activities. They are limited in the amount of lobbying they can do.

Put Any Profits Towards Your Mission

As a nonprofit, all income for the year must be put into your mission. Funds cannot benefit shareholders or individuals. You cannot operate to benefit any private interests. The mission you serve must be for the greater good of a group of people.

Tips for Keeping Your Tax-Exempt Status

Along with making sure you meet the requirements listed above, there are a couple of things you can do to keep your tax-exempt status.

Retain a Qualified Board of Directors

A qualified board of directors helps your nonprofit stay on track and continue to meet the necessary requirements. This talented collection of people works without compensation but bring important skills necessary for achieving your mission.

Track Your Assets Carefully

The IRS needs to make sure you actually meet the requirements for maintaining a 501(c)(3) status. Asset tracking is a great way to show that your assets and associated income are only being used to help further your mission. It also helps simplify year-end reporting, so you don’t have to take a huge amount of time gathering your information to file your tax return in the following months.

Trying to maintain your tax-exempt requirements can feel like a full-time job by itself. But by taking the time to make sure your organization meets the criteria outlined by the IRS and tracking your assets throughout the year, you can simplify the entire process.

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