Do Non-Profit Organizations Need to File Income Tax?
In the United States, along with the government and business sectors, there's a robust nonprofit sector. As of 2013, more than 1.5 million nonprofits were operating in the United States, according to the National Center for Charitable Statistics. In 2010, nonprofits had revenues of more than $1.51 trillion. Although nonprofits help people lead better lives, and they provide services government cannot, even tax-exempt nonprofits can't totally avoid the Internal Revenue Service.
With a few exceptions, nearly all nonprofits are required to provide some type of annual return to the IRS, even those that don't raise more than $5,000 in gross receipts annually. Under IRS rules, nonprofits aren't required to apply to the IRS for tax-exempt status according to the National Council of Nonprofits. Nonprofits that take in bigger amounts in annual receipts and that have successfully applied for tax-exemption from the IRS no longer pay federal income tax. They are required to file an annual informational tax return for purposes of letting the IRS know about their revenues, expenses, activities and administration. Non-exempt organizations pay income tax at the standard corporate rate. .
A tax-exempt nonprofit that normally raises $50,000 or more in gross annual receipts typically must file either Form 990, Return of Organization Exempt from Income Tax, or Form 990-EZ, the IRS's Short Form Return of Organization Exempt from Income Tax. The IRS provides a short formula to help nonprofits determine which form to use. Nonprofits with gross annual receipts equal to or greater than $200,000 or that have total assets equal to or greater than $500,000 should file Form 990. Nonprofits with gross annual receipts less than $200,000 and total assets less than $500,000, should file the 990-EZ. Unless they chose to fill out one of longer 990 forms, small nonprofits, in the sense that their annual gross receipts are normally equal to or less than $50,000, typically are required to file Form 990-N, also known as an e-Postcard. This has eight basic questions regarding the nonprofit's contact information and its amount of revenue for the tax year.
There are also certain types of nonprofits that file forms other than the 990 or the e-Postcard. Private foundations use Form 990-PF and black lung benefits trusts use Form 990-BL. Some common nonprofits that aren't required to file any informational tax returns include tax-exempt, faith-based organizations, religious schools, missions and missionary organizations. Subsidiaries of other tax-exempt nonprofits are also exceptions. Subsidiaries are groups formed under a larger parent organization. State and local committees of a political party or political candidate are also exempt from filing informational tax returns.
If a tax-exempt nonprofit engages in an activity that produces income not related to its basic mission, it must pay the Unrelated Business Income Tax, or UBIT, for short. For example, an organization that provides women undergoing chemotherapy with free wigs and appointments with cosmetologists that raises funds on an ongoing basis by selling a variety of t-shirts must report that income to the IRS. They will pay tax at the standard corporate rates for any UBIT income of more than $1,000 per year. They report the income on IRS Form 990-T, Exempt Organization Business Income Tax Return.
Nonprofits are granted tax exemption for, among other reasons, relieving the government of having to provide numerous social services, and protecting separation of church and state. Nonprofits face penalties for failing to file timely or inaccurate returns that range from steep fines to loss of tax-exempt status if an organization fails to file annual returns for three consecutive years. Nonprofits that file 990-Ns late don't face financial penalties, but automatically lose their tax exemption if they fail to file for three consecutive years. Losing tax-exempt status means that organization can no longer receive tax-deductible contributions and might have to pay corporate income tax retroactively.