Now, we know what you’re thinking: “Tax filing for tax-exempt organizations? That doesn’t seem to add up.” And, in a sense, you’d be correct. Tax-exempt organizations are, after all, tax-exempt and therefore do not have to file taxes in the traditional method that other individuals or businesses who are not tax-exempt have to. Of course, if there were no method for continually double-checking tax-exempt status, businesses all over would just apply to be tax-exempt and stop paying taxes. So, while tax-exempt organizations may not have to play by the same rules everyone else does, they do still have their own set of rules to follow. And, if you’re a tax-exempt organization that is unfamiliar with this process, it can be costly. After all, it’s not as simple as filing a Form 1040 or 941 and providing employees with W-2s.
Navigating not only where your business fits into the larger tax puzzle but also the things you need to do to ensure compliance can be a difficult and confusing process. At Payday HCM, we’ve had plenty of current and potential clients approach us with questions regarding the tax-exempt status and what this means come tax season. It can be easy to get lost in all the different resources that exist, which is why we want to ensure every business has access to everything they need in one place—regardless of whether they are our client or not.
So, in this article, we’ll be breaking down the tax-exempt status and what it means when it comes to tax filing. We’ll start by briefly breaking down what the tax-exempt status is and how it works, followed by an in-depth overview of how filing your taxes works if you do have the tax-exempt status. Finally, we’ll break down some of the common mistakes tax-exempt organizations make when it comes to filing. By the end of this article, you’ll have a good basis to ensure your organization files with confidence this tax season.
In this article, you will learn:
- What Does Tax-Exempt Mean?
- The Tax-Exempt Filing Process
- Common Mistakes Tax-Exempt Organizations Make When Filing
What Does Tax-Exempt Mean?
Firstly, we’ll start by breaking down what tax-exempt actually means, how it differs from just the regular tax status, and how you become a tax-exempt organization.
What Is Tax-Exempt?
The concept of tax-exempt organizations has its roots in the earliest history of the United States with the origination of voluntary and charitable associations. These came about in the earliest colonies in the U.S. prior to the formation of the republic, comprising of things like hospitals, fire departments, and orphanages.
Legislation-wise, the tax-exempt status would be introduced over a period of years from 1894 through 1969, but changes to requirements of the tax-exempt status have been introduced as late as 2006. The Revenue Act of 1913 and the Revenue Act of 1943 are of the most important as they established our current income tax system (and, thus, outlined rules for the tax-exempt status) and the requirement of filing a Form 990, respectively.
As of now, there are five main types of tax-exempt organizations as outlined by the IRS:
- Charitable organizations
- Churches and religious organizations
- Private foundations
- Political organizations
- Other nonprofits
The IRS provides specific guidelines for each of these different types of tax-exempt organizations and the requirements for becoming one. In order to acquire the tax-exempt status, you must fill out, most commonly, a Form 1023 for IRS approval, although the IRS provides a specific breakdown of the application process for each different type of tax-exempt organization.
How Does Tax-Exempt Differ From The Regular Tax Status?
There are a few different ways to answer this question: the most obvious way is to say that, well, tax-exempt organizations don’t pay taxes, whereas other businesses or organizations do. Besides that, there are some other differences between the two, mainly the filing process and the actual designation of the tax-exempt status.
Tax-exempt organizations won’t file the same forms that other businesses or companies have to file. Instead, tax-exempt organizations will mainly file a Form 990, which lists the organization's information, its revenue, and its expenses. A tax-exempt organization is also required to make certain documents available for public viewing in addition to other compliance requirements outside of filing.
The Tax-Exempt Filing Process
Next, we’ll get into the nuts and bolts of what the tax filing process actually looks like for organizations that are tax-exempt.
What Is A Form 990?
If you’re any sort of non-profit, you’re likely familiar with the Form 990. Form 990 goes beyond simply serving as a tax return for tax-exempt organizations—it can be used as a snapshot of the financial health of a tax-exempt organization, not only because of its thoroughness, but because of its public availability as well.
A Form 990 consists of twelve different steps or parts:
- Part I: Summary- including an organization’s mission as well as its revenue, expenses, and final net balance
- Part II: Signature block- where an officer of the organization affirms the correctness of the information above
- Part III: Statement of program service accomplishments- lists an organization’s mission statement as well as its three biggest program services with related revenue and expenses
- Part IV: Checklist of required schedules- a list of schedules or addendums that must be included with the Form 990
- Part V: Statements regarding other IRS filings and tax compliance- addresses any tax-filing or compliance-related issues
- Part VI: Governance, management, and disclosure- information on how the organization is governed and managed
- Part VII: Compensation- compensation for any officers, directors, trustees, key employees, highest compensated employees, and independent contractors
- Part VIII: Statement of revenue- revenue from unrelated business income or related and exempt funds
- Part IX: Statement of functional expenses- a detailed breakdown of expenses
- Part X: Balance sheet
- Part XI: Reconciliation of net assets
- Part XII: Financial statements and reporting- states the organization’s financial reporting method (cash or accrual) and whether an accountant compiled and reviewed the financial statements
As hinted at in part IV of Form 990, some organizations may be required to attach additional forms or schedules to their return. While there are many different types of schedules, ranging from Schedule A to O, the most common type is Schedule O. This schedule helps to provide “narrative information” for different questions on Form 990.
Does Every Tax-Exempt Organization Fill Out A Form 990?
Now, if you’re like us, you’re probably looking at the Form 990 and wondering, “Do I really have to fill all of that out?” Well, for some of you, yes, you will have to fill all of that out. There are some exceptions, however, to the Form 990 requirements, although these exceptions will still be filling out some variation of the Form 990.
For organizations with gross receipts of under or equal to $50,000 may file a Form 990-N, an electronic-only abbreviated version of the Form 990. For organizations with gross receipts less than $200,000 and assets less than $500,000, you can opt to file a regular Form 990 or a Form 990-EZ, which, like the Form 990-N, is an abbreviated version of the full Form 990.
Private foundations are also an exception to the regular Form 990 rule. For a private foundation, you’ll fill out its own Form 990-PF, which is a return for a private foundation. This form is similar in length and format to a regular Form 990, but has slight differences in terms of the requirements of the various parts.
Common Mistakes Tax-Exempt Organizations Make When Filing
Now, we’ll break down some of the common mistakes organizations make when filling out a Form 990 as well as things to keep in mind ahead of the filing deadline.
How To Avoid Common Errors When Filing
Considering how long and detailed some of these tax forms are for tax-exempt organizations, it’s not hard to see how mistakes can slip through the cracks. Even for those with experience, it’s not hard to accidentally leave a field blank or to forget to attach a certain schedule. Even still, it can be helpful to be on the lookout for some common pitfalls.
Firstly, the biggest thing to check for is to ensure you filled out all the fields. Again, there are a lot of questions on the regular Form 990—be sure you’ve filled everything out. Secondly, make sure you’re filling out the correct form. Some organizations have to fill out a Form 990, but some can use the other forms. Make sure to double-check which form you should be using.
Thirdly, be sure to include any required schedules with your return. While Schedule O may be the most common schedule, it isn’t the only schedule. Be sure to double-check you’ve included all necessary forms. One important thing to note here is that any tax-exempt organizations with unrelated business income will also need to submit a Form 990-T.
Tips For Tax-Exempt Organizations Ahead Of The Filing Deadline
As the deadline approaches for tax-exempt organizations to file their returns, it’s good to keep in mind a few things. Firstly, you do have the ability to file for an extension. You can file a Form 8868 by the original filing deadline of your organization’s return to acquire an automatic six-month extension.
The IRS also has a series of interactive trainings for organizations looking to brush up on their knowledge ahead of the filing deadline. These trainings range from applying for 501(c)(3) status to a Form 990 overview. Also, as these documents are available for public viewing, it’s a good idea to ensure any narrative portions of the forms accurately reflect your organization.
Make Stress Exempt From This Year’s Tax Season
Tax season can be stressful, especially for tax-exempt organizations. Not only do you have to file your returns, you also have to ensure to include all of the various proper forms, make sure your Form 990 is filled out correctly and completely, and be sure any public-facing documents reflect the ethos of your organization. These things aren’t easy, especially when you add on the weight of just running your organization on top of that. Luckily, with the information included in this article, you’ll have the ability to stay ahead of the curve on this year’s tax season and ensure all of your documents are complete and filed on time.
When it comes to tax season, nothing is more important than the people you have at your side helping you reach the finish line. A good payroll provider can mean the difference between a smooth filing process and paying hefty penalties. Not feeling that sense of partnership in your current arrangement? Check out our article on the four things to know about payroll conversions.