Once your nonprofit organization gets approved by the IRS for a tax exemption, you must maintain tax exemption. You must know what actions or activities could jeopardize your tax-exempt status.
Your job is to know what you should be careful of to keep your tax exemption because if it becomes revoked, your organization potentially must pay taxes.
So, let us talk about the top three activities to avoid:
- Failure to file
Failing to file your annual information return or notice with the IRS for three consecutive years. There are some exemptions to filing a Form 990 information return. In general, if your organization is not an exempt church or church auxiliary and fails to file Form 990 with the IRS for three years in a row, then your organization receives an automatic revocation, which is not a good thing. If your organization loses its tax exemption through automatic revocation, you may have to pay federal income tax. You may also have to file a corporate tax return or an estate trust tax return alongside paying those taxes. Your organization would have to re-apply for tax exemption to reinstate. You want to avoid that by filing your information returns on a timely basis.
- Excess benefit transactions
When does an excess benefit occur? When there is unreasonable compensation or expense reimbursement or some other benefit to someone of influence in the organization. In this situation, your tax-exempt organization provides a transaction in which they give a disqualified person the use of an economic benefit. The value of what that person receives far exceeds what they had to give up or give to the organization. For example, a tax-exempt organization sold the property to a board member, and the fair market value of the property is $100,000; But it sold to the board member who is a person of influence for $20,000.
This is an excess benefit transaction because the fair market value of the property is $100,000. The board member only had to pay $20,000, resulting in a gain or economic benefit to the board member of $80,000. If there is going to be a transaction with a disqualified person, it needs to be at arm’s length.
- Lobbying and political activities
Participating or intervening in any political campaign on behalf of a candidate for public office can jeopardize your tax exemption. Lobbying is when you attempt to influence legislation; you are either coming out for or against actual or pending legislation. You’re trying to contact, asking the public or your members to contact members of any legislative body. Be very careful with these types of activities and understand the rules.
Temple Management is here to assist your nonprofit with every aspect of accounting so you can focus on running your organization.