1 week ago Last updated September 21st, 2022 51 Reads share

Tax Guide for Nonprofit Organizations: What You Need to Know

Tax Guide for Nonprofit OrganizationsImage Credit: Shutterstock

Do you own or run a nonprofit organization? If so, it’s important to understand the taxes that apply to your organization. In this guide, we will discuss the different taxes that nonprofit organizations are subject to, as well as how to file and pay taxes. We’ll also provide some tips on how to keep your taxes as low as possible. So whether you’re just starting out with your nonprofit or you’ve been running one for a while, this guide is for you!

What is a Nonprofit and how does it work?

A nonprofit is an organization that uses its surplus revenue to achieve its goals, rather than distributing it among shareholders or owners. Nonprofits can be charitable organizations, educational institutions, religious groups, and more. Many nonprofits are exempt from paying taxes on their income; however, there are still some taxes that nonprofits must pay.

This guide will help you understand the different taxes that may apply to your nonprofit organization. We’ll cover:

  • Income taxes
  • Property taxes
  • Sales taxes
  • Payroll taxes
  • Excise taxes

As a nonprofit organization, it’s important to be aware of the different types of taxes that may apply to you. By understanding which taxes you need to pay, you can ensure that your organization is in compliance with the law.

What is the difference between a nonprofit and a not-for-profit organization?

Nonprofit organizations are created for the public good, whereas not-for-profit organizations are businesses that don’t aim to make a profit. Nonprofits must follow certain rules and regulations in order to maintain their status, including filing for 501(c)(three) tax-exempt status with the IRS.

Not all nonprofits are required to pay taxes, but they may still be subject to other taxes, such as property taxes and payroll taxes. In general, nonprofits are exempt from federal income taxes on money earned from activities related to their mission. They may also qualify for state and local tax exemptions.

However, there are some exceptions to these rules. For example, if a nonprofit earns income from unrelated business activities (such as renting office space to a for-profit business), that income is subject to taxes. Additionally, nonprofits must pay taxes on any gifts or grants they receive from for-profit businesses.

If you’re thinking of starting a nonprofit organization, it’s important to understand the tax implications. Consulting with an accountant or tax advisor can help ensure that you’re in compliance with all applicable laws.

What are some examples of Nonprofit organizations?

  • 501(c)(0) – business leagues, chambers of commerce, real estate boards, etc.
  • 501(c)(02) – veterans’ organizations
  • 501(c)(03) – religious organizations
  • 501(c)(04) – civic leagues and social welfare organizations
  • 501(c)(05) – business leagues, chambers of commerce, real estate boards, etc.
  • 501(c)(06) – agricultural or horticultural organizations
  • 501(c)(07)- labor, agricultural or horticultural organizations

As you can see, there are many different types of Nonprofit organizations. Each type is subject to different taxes. In the next section, we will discuss the taxes that apply to nonprofit organizations.

Taxes that apply to Nonprofit organizations

The taxes that apply to nonprofit organizations depend on the type of organization. The most common types of taxes for nonprofits are income taxes, property taxes, sales taxes, payroll taxes, and excise taxes.

Income Taxes

Most nonprofits are exempt from paying income taxes; however, there are still some circumstances in which a nonprofit may be required to pay income taxes. For example, if a nonprofit earns income from activities that are not related to its mission or purpose, it may be required to pay income tax on that income. Additionally, a nonprofit may be required to pay taxes on any income that it receives from for-profit businesses.

If a nonprofit is required to pay income taxes, it must file an annual tax return with the IRS. The tax return must include information about the organization’s income and expenses, as well as information about its assets and liabilities. Additionally, the tax return must disclose any transactions that the organization has made with related parties.

The IRS provides resources and guidance for nonprofits that are required to file an annual tax return. The first step for a nonprofit that needs to file taxes is gathering all of the necessary documentation. This includes income and expense statements, as well as asset and liability information. Once all of the required documentation has been gathered, the nonprofit can begin to fill out its tax return.

The tax return must be filed with the IRS by the 15th day of the fourth month after the end of the organization’s fiscal year. For example, if a nonprofit’s fiscal year ends on December 31st, its tax return would be due on April 15th of the following year. If a nonprofit fails to file its tax return by the due date, it may be subject to penalties and interest charges.

Property Taxes

Nonprofit organizations must pay property taxes on the buildings and land they own. In some cases, they may be exempt from paying property taxes on the land, but not on the buildings. The amount of property tax a nonprofit organization owes depends on the value of the property and the tax rate set by the government.

Nonprofit organizations can apply for an exemption from paying property taxes on their buildings. To qualify for an exemption, the organization must use the building for religious, charitable, or educational purposes. The organization must also meet certain requirements set by the government.

If a nonprofit organization does not qualify for an exemption from paying property taxes, it can still appeal to the government to lower its tax bill. The organization can provide evidence that it is struggling to pay its taxes and request a reduced rate.

Some states offer property tax relief programs for nonprofit organizations. These programs can help nonprofits lower their property taxes or get a refund on the taxes they have already paid.

Nonprofit organizations should research the property tax laws in their state to find out if they qualify for any exemptions or relief programs. By doing so, they can save money that can be used to further their mission.

Sales Taxes

Nonprofits are generally required to pay sales taxes on the goods and services they sell. However, in some states, nonprofits may be exempt from paying sales taxes on certain items, such as food or clothing.

Penalties for failing to comply with sales tax laws can be costly, so it is important for nonprofits to ensure they are up-to-date on the rules in their state. Sales tax compliance is just one of many areas where it pays to have a knowledgeable accountant on your team!

Payroll Taxes

Nonprofits are required to pay Social Security and Medicare taxes on the wages they pay to employees. These taxes help fund the Social Security and Medicare programs.

Nonprofits are also required to withhold income taxes from their employees’ paychecks. The amount of income tax withheld depends on the employee’s tax bracket. The nonprofit organization will then send the withheld taxes to the government. If a nonprofit organization does not withhold taxes from its employees’ paychecks, it may be subject to penalties.

Excise Taxes

Nonprofits may also be required to pay excise taxes. Excise taxes are taxes on the sale of certain goods or services, such as gasoline, alcohol, and cigarettes. The amount of excise tax a nonprofit owes depends on the type of goods or services it sells and the tax rate set by the government.

How does a nonprofit organization file taxes?

Nonprofit organizations must file an annual return with the IRS. This return is called Form 090-EZ for most nonprofits. However, some nonprofits may have to file a different form depending on their size and activities. For example, taxes that apply to nonprofit organizations, how to file and pay taxes, and how to keep taxes low.

NPO IRS audit process

The IRS conducts audits of nonprofit organizations to ensure they are complying with tax laws. Audits can be conducted by mail or in person. The IRS will usually contact a nonprofit organization by mail to request information about its taxes. If the IRS audits a nonprofit in person, an agent will visit the organization’s office to review its records.

The IRS may audit a nonprofit organization for several reasons, including if the organization:

  • Filed its tax return late
  • Did not pay its taxes
  • Claimed an exemption it did not qualify for
  • Failed to file a required tax return
  • Claimed deductions it was not entitled to

If the IRS finds that a nonprofit organization has violated tax laws, it may be required to pay fines or back taxes. In some cases, the IRS may revoke the organization’s tax-exempt status.

Do nonprofits have to report donations?

Yes, nonprofit organizations must report donations they receive on their tax return. Donations are generally reported as revenue on Form 090-EZ. However, if a nonprofit received donations of property, such as land or a building, it must report the fair market value of the property on its tax return.

Nonprofits should keep accurate records of all donations they receive. Donors may be able to take a tax deduction for their donations, so they will need to provide the nonprofit with their name, address, and Social Security number.

How can nonprofit organizations keep accurate records?

Nonprofits can keep accurate records through a few different avenues, with one being accounting software. However, the best thing to do is use specifically designed accounting software for nonprofits. This software can help nonprofits track their income and expenses, as well as the donations they receive.

Another way to keep accurate records is to hire a bookkeeper or accountant. This person can help the nonprofit organization keep track of its finances and ensure that all income and expenses are properly recorded.

Finally, nonprofits should create a system for keeping track of donations. This system can be as simple as a notebook where all donations are recorded, or it can be an online database. Either way, it is important for nonprofits to have a system in place so they can track their donations and ensure they are accurately reported on their tax return.

Overall, nonprofit organizations have to file an annual return with the IRS and may be subject to audits. If you have any questions about how your nonprofit organization should file taxes, or if you need help keeping accurate records, be sure to consult with an accountant or tax attorney. These professionals can ensure your nonprofit is in compliance with all tax laws and regulations.

Thanks for reading! We hope this post helped explain the basics of filing taxes for a nonprofit organization.

Tyler Page

Tyler Page

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