There are more than 30 different types of nonprofits within the federal tax code and not all of them are exempt from taxes.
So, you may be wondering… do nonprofits pay taxes? The answer is a bit complicated.
Each type of nonprofit is different when you are considering lobbying and tax-deductible contributions, among other things.
To learn about how nonprofit taxes work, keep reading below and find more information that may help.
What is a Nonprofit?
A nonprofit is something that is often talked about, but not often understood in the context it should be.
People often believe that nonprofits are automatically tax-exempt, but this is not the case. With over 30 types of nonprofits, it can be difficult to determine which nonprofits fall into which category.
In the different sections of the tax code, you will find the different types of nonprofits.
For example, in section 501(c)(4), the social welfare organizations, volunteer fire companies, and homeowners associations can be found. In section 501(k), you’ll find child care organizations.
By being in a specific section, an organization is stating that it meets certain requirements and is or is not exempt from paying federal taxes. The biggest thing to remember is that nonprofits will not be paying out profits (which is why they are called nonprofits in the first place).
Donations that others make to nonprofits are generally tax-deductible for those individuals, but the nonprofit won’t pay taxes on those donations.
What Does a Nonprofit Do?
The purpose of a nonprofit is to serve the public.
This may be through offering goods to the community or providing services that are needed by the local population. Some nonprofits are capable of doing both.
The financial information, as well as operational information, has to be made public.
This is to ensure that businesses or individuals that choose to donate are aware of what the organization they are donating to is doing behind closed doors. They also want to know how the money they’ve donated previously is being put to good use!
Before a nonprofit is able to become tax exempt, it must request and complete a 501(c)(3) status from the IRS directly.
Once it is registered and starts operations, the organization has to maintain compliance. This compliance will be with the state agency that regulates the charitable organizations within that state.
A nonprofit may also receive grants from the public, government, or other foundations to do specific types of work. If your nonprofit wants to do a big project, for example, you can apply for grants to get money to pay for resources.
To do all of this effectively, you may need to have a knowledgable and dedicated accounting team on your side.
Do Nonprofits Pay Taxes?
While nonprofits typically will not have to pay taxes, they still have to submit annual tax returns with the IRS.
Being tax exempt means an organization doesn’t pay federal taxes, but they still have to provide the IRS with the information they need. This is true for any nonprofit, no matter their status.
A nonprofit that identifies as a 501(c)(3) is the most common type you will find. It will include any type of organization that is educational, scientific, religious, literary, or charitable.
If you have a nonprofit of this type, you would use the IRS form 1023 and file taxes each year. Contributions are generally going to be tax exempt.
Any organization that falls into this category will have to be:
- A public charity that people may donate to, such as the Red Cross
- A private foundation, such as the Getty Foundation
Keep in mind that there are other types of nonprofits. While these are the most common out there, your nonprofit may fall into a different category.
IRS Form 990
Since nonprofits have to report every year, they will submit a variation of the IRS Form 990. This form helps the IRS (as well as the public) look at what the nonprofit is doing and how it is operating.
The information included on this form would be the nonprofit’s mission, the programs provided, and the overall financial history for the year.
Depending on the filing year and the gross receipts of the organization, there are different types of the 990 form. These include the Forms 990, 990-EZ, and the 990-N.
An experienced accountant can help you determine which option is right for your nonprofit. You will get additional information that you may not be able to find on your own, but you’ll also have the chance to ask questions and know your forms are being completed correctly.
If a nonprofit that is required to file a Form 990 does not do it for 3 years in a row, the IRS removes the tax-exempt status from the organization.
Exceptions to this rule may include faith-based organizations, government corporations, or certain state institutions.
What Does Your Nonprofit Need to Do?
Trying to answer the question “do nonprofits pay taxes?” is a little confusing, but there are experts out there that can help.
With all of the options you have, you need expertise on your side. You also need accountants that know and care about what you’re doing for others.
If you have accounting needs, the Charity CFO wants to help you continue to improve our communities.
Get some more information on our policies and practices, but most importantly, find out why you should choose us to help you with your accounting and tax return by contacting us today.