Tax season doesn’t have to be a source of major stress for your nonprofit. So long as you’ve remained organized throughout the year and have the right backing from your accounting team, you don’t need to worry too much.
However, you should know what you’re getting yourself into each year.
Nonprofit tax season is primarily focused on a single document: your Form 990.
Here at Jitasa, we’ve completed over 2,500 Form 990 tax documents for various organizations over the years. This means our team has seen almost everything there is to see when it comes to nonprofit tax season. So, we’ve compiled this guide of the five important things your organization should know before filing your annual tax forms, including:
- Why the Form 990 Exists
- Which Form 990 You Can File
- Additional Information You May Need to File
- Consequences of Failing to File or Filing Late
- Tips to Make Filing Tax Forms Easier
Form 990 filing might seem like a confusing process at first, but with the right guidance and information, your organization can confidently walk right through tax season. Let’s get started.
Why the Form 990 exists
When your organization filed your Form 1023, you agreed to take on the responsibilities of a 501(c)(3) organization and in return receive certain tax benefits like ensuring deductible donations for individuals and receiving exemption status for your organization.
But with every system of rules and regulations intended for good, there will always be the occasional person (or in this case, organization) who will take advantage of the system. There are an unfortunate few who would take advantage of this tax exemption status to collect a fortune for themselves in non-taxed income.
And it’s because of those people that Form 990s have to be filed each year.
The Form 990 is a way for the government to ensure that your nonprofit is doing what you set out to do and reinvesting income into the organization as you promised you would during the first few months of incorporation.
But before you get too upset about having to file tedious paperwork each year, Form 990s actually have an important place in your fundraising strategy and can lead to several monetary benefits for your organization. Consider the following:
- Your Form 990 is published publicly, creating a sense of transparency between you and your supporters.
- Filing the Form 990 annually forces your organization to hold itself accountable to donors and regroup to discuss finances regularly.
While the Form 990 may have been created as a check-in system for your organization with the IRS, it also presents noticeable and worthwhile benefits. Transparency and trust lead to additional donations from supporters while accountability ensures you’re maximizing the use of those funds!
Which Form 990 you can file
The Form 990 has several variants that you might qualify to file if your organization fulfills a few simple requirements. Other than the 990-PF (which is specifically designed for private foundations), the usually discussed variations of the Form 990 are shorter and slightly simpler than the original form.
Understandably, smaller organizations may be required to submit less information than larger organizations. Let’s examine the different variations of the Form 990:
- Standard Form 990: This is the original twelve-page form, filed by organizations who have more than $200,000 in gross receipts or assets worth more than $500,000.
- Form 990-EZ: This form is essentially the little brother of the standard Form 990. It’s four pages long and can be filed by organizations who have less than $200,000 in gross receipts or less than $500,000 in assets.
- Form 990-N (or 990 postcard): This is the shortest form, filed by small organizations with less than $50,000 in gross receipts. It’s an eight-question form filed online.
You can move up the ladder of these forms if you really want to. You won’t be penalized if you make $150,000 in gross receipts and decide to file the standard Form 990 rather than the EZ form. However, you can’t move down the ladder. If you have $250,000 in gross receipts, you cannot file the Form 990-EZ or 990-N.
But why would you want to move up the ladder? It saves you time and energy to make sure you’re filing the shortest and simplest form possible for your organization before tax season begins.
Additional information you might need to file
You’ll need to make sure your staff members have what they need to file their personal tax returns. This means issuing W-2s for staff and 1099s for contractors. And yes, there is a difference! According to this Jitasa 1099 guide, W-2s are filed for individuals considered a part of your staff, but 1099s are filed for those who:
- Are not employees
- Received payment for their services to your nonprofit
- Were paid over $600 from your organization
Any W-2s or 1099s should be issued as early as possible during the year to simplify individual tax season for those who have helped your organization get where it is today.
For the organization’s tax returns, keep an eye out for necessary state filings and any additional schedules that are necessary for your Form 990 or 990-EZ. State filings vary by state, so be sure to check your state regulations or ask your accountant about requirements to make sure you remain compliant with state laws.
Schedules must be filed if your organization meets certain criteria for your earnings throughout the past year. If you meet the criteria explained on the 990 instructions, you might need to file schedules such as:
- Schedule B: Contributors. Here, you must list out your organization’s contributors and provide some additional details about your reported revenue.
- Schedule D: Supplemental Financial Documents. Organizations may need to file this schedule to report donor-advised funds, certain art or museum collections, and other supplemental financial information.
- Schedule E: Schools. Private schools may need to provide additional information about their services and recent updates with this schedule.
- Schedule F: Activities Outside the U.S. This is where organizations report on the activities they completed outside of the U.S. during the tax year.
This is just a sample of the many schedules available for the Form 990 and its variations. If you’re concerned about knowing which schedules you need to fill out or filling out the information, you may consider discussing it with an accountant. While you might dread tax season, nonprofit accountants don’t mind rifling through financial documents and statements to determine which forms and schedules your organization needs to file.
Consequences of failing to file or filing late
By the time tax season rolls around, you’re likely knee deep in your philanthropic strategy for the year. That can make it difficult to return to the financial discussions of last year in order to file tax forms.
That’s why in many cases, you should try to file long before your tax form deadline. There are cases, of course in which you might delay the inevitable, but we’ll get to that in a minute.
First, you’ll be wondering: When is the tax filing deadline for my nonprofit? For nonprofits on the calendar fiscal year, your tax deadline is May 15th. If your organization is not on the calendar fiscal year, your tax deadline is the 15th day of the 5th month after the conclusion of your fiscal year.
If there were no consequences for filing late or failing to file your taxes, would you be driven to get the forms in before the deadline each year? If so, you’re more motivated than most. Of course, the IRS sets consequences for nonprofits who fail to file before their set deadline. These potential consequences include:
- Fees ranging from $20 to $100 per day the return is late
- Loss of your ability to accept tax-deductible donations
- Loss of your tax-exempt status
However, as we alluded to earlier, the IRS offers an option for an extension for organizations who might not make the deadline, allowing you to extend your due date by six months.
To extend your tax deadline, you’ll need to file a Form 8868. This isn’t designed for organizations who simply forgot to file, but for legitimate reasons. For example, if you’re conducting a financial audit for your nonprofit, you may decide to request an extension. This allows you to incorporate any audit results and next steps, then include those results on your Form 990.
Tips to make filing tax forms easier
Tax forms must be filed on a regular basis. Instead of scrambling to pull together financial information on an annual basis, take regular maintenance steps throughout the year. Keeping things orderly will ensure tax returns are as painless as possible.
Here are some tips you can take today:
- Keep an eye on your growth. According to Double the Donation, charitable donations grew by 4.1% over the past year (the 6th year in a row that it’s increased). Growth means that the tax form that you’ll file may change. Knowing how much you’ve grown upfront will ensure you know exactly which form to file come tax season.
- Check in with your finance team. Be sure you’re compiling and reviewing important financial reports on a regular basis. This will help ensure your finances are in order before the rush to compile tax documents begins. Better yet, work with them to develop templates for your financial documentation so that you have concrete summaries of the various financial information at your fingertips whenever you need it.
- Work with a nonprofit accountant. We recommend that you look into an outsourced accounting firm to help with your tax preparation and documentation each year. These experts can guide you through the process and answer any questions that you may have about finances and taxes.
The key to making tax season easier is to stay organized throughout the year. Well-organized financial data makes it easier to pull the metrics you need for your financial statements and creates avenues for clear communication between you and accounting professionals.
Tax season may seem overwhelming or frustrating. But it doesn't have to be! So long as you understand why your tax forms exis and get the right guidance, you should be able to get through tax season painlessly.
However, we do recommend that you loop in a professional when it comes to taxes. The guidance you get from them will be more personalized than any book, guide, or article that you read on the subject. Make sure that any tax professional you bring in also has experience working with nonprofit organizations so that they’re well versed in 990s and related state filings. Good luck!
About the author: Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not-for-profit organizations.