Gaining
your 501(c)(3) status is, for many, an exciting and pivotal step towards accomplishing
your organization’s goals. With that being said, there are several ongoing
obligations and prohibited activities that are important for you to be
aware of to ensure you do not incur fines or lose your organization's
tax-exempt status. This article proceeds by laying out your ongoing obligations
and then the activities you should avoid. For a more in-depth explanation of
these issues, you can check out the I.R.S’s Compliance
Guide for 501(c)(3) Organizations.
While your 501(c)(3) organization is exempt from federal income tax, you must still comply with reporting obligations, meaning that you must still file an annual return. Additionally, you are responsible for employment taxes and unrelated business income taxes.[1]
1) A 501(c)(3) organization must file an annual information return.[2] The determination of what form you must file will usually be based on your organization’s gross receipts and total assets. See below for the different return forms, as well as an image detailing which form your organization should file.
· Form 990, Return of Organization Exempt from Income Tax
· Form 990-EZ, Short Form Return of Organization Exempt from
Income Tax
· Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt
Organizations not Required to File Form 990 or 990-EZ.[3]
What are the penalties for failing to file? Failure to file the required and accurate return form could result in a fine of up to $20 a day until the return form is filed or the information is corrected. Failure to file for three consecutive years will result in revocation of an organization’s tax-exempt status.[4] However, this fine will not exceed the lesser of the following: $10,000 or 5% of the organization’s gross receipts.[5]
2) If your business earns $1,000 or
more in gross income from a trade or business that is unrelated to your
organization’s tax-exempt purpose, then you must file a Form 990-T (Exempt
Business Income Tax Return).
You may need to file a Form 990-T if the activity is a for-profit business or trade that is regularly ongoing and is not really related to your nonprofit’s tax-exempt purpose.[6] Potential examples of activities that would fit this criterion include: selling advertising space in publications, raising money through gambling-type fundraisers, and selling merchandise that isn’t related to the organization’s purpose.[7]
What are the penalties for failing
to file? You may
be fined up to $500 or more.[8]
3) Employment Tax Returns
501(c)(3) organizations are not
excluded from the requirement that all businesses that pay wages to employees
face; they must withhold, deposit, and pay employment taxes. This includes
federal income tax withholding, social security, and Medicare.[9]
PROHIBITED ACTIVITIES:
1) Political Campaign Intervention
A 501(c)(3) organization is forbidden from participating in any type of political campaign; doing so will result in either revocation of the organization’s tax-exempt status or imposition of certain fines.[12]
With that being said, this does not
mean that your organization is barred from any political involvement. For
example, your organization can encourage the public to vote through something
along the lines of a get-out-the-vote drive.[13]
However, you must be careful that your organization does not advocate for one candidate
over another.[14]
Additionally, this does not mean
that if you run a non-profit, you are barred from ever vocalizing your opinions
on political matters. Instead, you are only disallowed from making statements
about politics in connection with your organization.[15]
Essentially, you must stay clear of identifying an individual that is running
for public office when you are speaking in connection with your organization.[16]
2) Legislative Activity
A 501(c)(3) organization is forbidden from engaging in substantial legislative activity or “lobbying.”[17] Your 501(c)(3) organization will most likely be regarded as attempting to lobby if it contacts, or encourages the public to contact, a member or employee of a legislative body for the purpose of impacting the legislative process. For example, if you contacted a legislative employee and urged them to reject a certain piece of legislation, that would constitute lobbying. Likewise, if you were to urge the public to contact a legislative body for the purpose of advocating the acceptance of certain legislation, that would also constitute lobbying. However, a nonprofit may still educate the public on matters of public policy if it is in furtherance of the organization’s mission. [18]
3) Private Benefit
As a tax-exempt organization, you are forbidden from providing benefit to a person if that person is not within the class of people who your organization’s mission aims to benefit, unless the benefit can be classified as purely “incidental.”[19]
The analysis of whether something is considered an “incidental” benefit is both qualitative and quantitative.[20] Qualitatively, the private benefit cannot be more than a byproduct of actions that you are taking to further your organization’s mission.[21] Quantitively, the benefit to the private individual must be insubstantial when compared to the benefit to your organization’s mission.[22]
4) Operation Not in Accordance
with Stated Exempt Purpose
In order to maintain your tax-exempt status, your organization must maintain its original purpose, as stated in your tax-exemption application. If you stray from this original purpose, you must notify the IRS.[23]
[1] I.R.S. Compliance Guide for 501 (c)(3)
Public Charities. 8. https://www.irs.gov/pub/irs-pdf/p4221pc.pdf
[2] Id.
[3] Id.
[4] Id.
[5] Id. at 12.
[6] Id.
[7] Id.
[8] Id.
[9] Id. at 13.
[10] Id.
[11] Id.
[12] Id. at 5.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id. at 7.
[18] Id.
[19] Am. Campaign Acad. v.
Comm’r,
92 T.C. 1053 (1989)
[20] Andrew Megosh, Et AL, Private Benefit
Under the IRC 501(c)(3). https://www.irs.gov/pub/irs-tege/eotopich01.pdf.
[21] Id.
[22] Id.
[23] I.R.S. How to lose your 501(c)(3)
tax-exempt status (without really trying). 3.
https://www.irs.gov/pub/irs-tege/How%20to%20Lose%20Your%20Tax%20Exempt%20Status.pdf.