Tax Information for Nonprofits

(including getting tax-exempt status)

Assembled by Carter McNamara, MBA, PhD

Applies to nonprofits unless otherwise noted.

Sections of This Topic Include

Do I Need Help to Get Started?
Importance of Good Record Keeping
Getting Tax-Exempt Status
Federal, State, Sales, Payroll Taxes, etc.
Preparing and Filing Form 990s (including about public disclosure)
Donations and Taxes
Unrelated Business Income Taxes (UBIT)
Lobbying and Taxes
Assessing Your Tax Management Practices
Special Topic -- When Hiring, Need Independent Contractor or Employee?

General Resources
Free, Online, Self-Paced Program to Completely Build/Strengthen Your Nonprofit

Also see
Related Library Topics

Also See the Library's Blog Related to Taxation and Nonprofits

In addition to the articles on this current page, also see the following blogs that have posts related to Taxation and Nonprofits. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog. The blog also links to numerous free related resources.

Library's Nonprofit Capacity Building Blog
Library's Social Enterprise Blog


Do I Need Help to Get Started (with taxes, payroll, etc.)?

(If you're just getting started with your new nonprofit, then see the section Starting a Nonprofit.)

You Can Do Much of the Work Yourself -- But Get Tax Advice and Guidance

You should strongly consider getting some help with your taxes. You can do much of the work yourself, but you should have some basic guidance and advice from a tax advisor who understands nonprofit matters. For example, it's very important how you characterize your plans when filing for incorporation with your state or for tax-exemption with the IRS. In addition, there are various reports and filings you likely have to submit. When you're tax-exempt, you're likely to also be exempt from a variety of other taxes, including state, property and sales taxes. A nonprofit-knowledgeable tax advisor can help you a great deal. Ask other nonprofits for references to good tax advisors. Ask a local funder. Call the accounting aid association. Note that, in Canada, you can get tax-exempt status at the provincial or federal level.

The following links might also help you. See
Bookkeeper, Accountant, or CPA - What Type of Financial Professional Does Your Small Business Need?
Getting and Using a Lawyer
Tips for Choosing a Tax Preparer

Using a Payroll Service

As a new nonprofit, you should strongly consider using a payroll service. This type of service can work with your tax advisor (or provide tax advice, as well) to ensure regular and accurate withholdings for various types of taxes. The service can also produce the reports needed to file your yearly taxes. You might get a recommendation for a service by calling your local association of certified public accountants or several nonprofits that are similar in nature to yours.

Importance of Good Record Keeping

Good tax management starts with good record keeping, especially financial records. You should have a basic sense about
Financial Statements

Getting Tax Exempt Status

You do not have to get tax-exempt status. However, you should seriously consider this because it allows you to avoid paying federal taxes on your income (within certain limits and types of income). It also helps you to raise money more easily.

NOTE: Obtaining tax-exemption if often one of the steps visited when formally starting up your nonprofit. See Starting a Nonprofit.

NOTE: Most states also allow tax-exempt nonprofits to also be exempt from some types of income, sales and property taxes. To find out which taxes you might be exempt from, contact your Attorney's General office in your state.

Here are two affordable attorney's services:
MAP for Nonprofits
Stinson Morrison Hecker

Basics of Getting Tax-Exemption

Look at the IRS What You Need to Know if Your Organization Plans to Apply for Tax Exemption

Then review
Nonprofit Basics

IRS Form to File for Exemption

You might review the list of types of tax-exempt organizations to note (most of) the IRS's wide variety of organizations and classifications of tax-exempt nonprofits.

Nonprofit organizations file for tax-exemption by using IRS Publication 557, Tax-Exempt Status for Your Organization.

Where to Get More Forms

Any needed federal forms can be downloaded from the Tax Information for Charities & Other Non-Profits.

Sample 501(c)(3) Application

There are a variety of tax-exempt classifications. The 501(c)(3) is one of the most well known, and is for "charitable organization". Note that this classification does not necessarily mean that the nonprofit is also charitable and/or tax-deductible.
Form 1023 Help

Federal, State, Sales, Payroll Taxes, etc.

Tax-exempt organizations usually do not have to pay federal taxes on income. In addition, many states provide exemptions to income taxes, property taxes, sales taxes, etc. It would be extremely difficult to track and report any standard guidelines about these various types of taxes across the states. The best way to find out what taxes you have to pay is to contact your Secretary of State's office.

Using a Payroll Service

(As noted above, if you are a new business, you should strongly consider using a payroll service.)

Also see
Online Payroll Taxes -- Where to Get Help

Preparing and Filing Form 990s

The nonprofit tax form that is filed to the IRS is the Form 990.
Form 990
How to Read the IRS Form 990 & Find Out What it Means
Quality 990 Site (has many resources)
Completing the 990 online

Revision of Form 990

IRS Has Revised the Form 990
Redesign Form 990 Requires Extensive Preparation
Form 990 Redesign for Tax Year 2008 (Filed in 2009)

Public Disclosure of Form 990s

Form 990 Policies -- Is It Better to Check Yes or No?
NPO Public Disclosure Regulations Site
Tax Form 990 changes offer chance to disclose broadly

Donations and Taxes

Substantiation and Disclosure Requirements
What Must a Tax-Exempt Group Do to Acknowledge Donations?

Also see:

Registration of Fundraising Activities

Unrelated Business Income Taxes (UBIT)

The IRS limits the amount the revenue a nonprofit can make that is not directly associated with the mission of the nonprofit. This is in order to prevent nonprofits from unfairly competing with for-profit organizations.
Nonprofits Can Generate an Earned Income

The publication, Venture Forth!: The Essential Guide to Starting a Moneymaking Business in Your Nonprofit Organization, includes step-by-step guidelines to plan an earned-income venture for nonprofits, including the necessary financial analyses and forms, and guidelines about addressing UBIT.

Lobbying and Taxes

There are certain limitations on lobbying by all types of tax-exempt organizations, for example, 501(c)(3), 501(c)(4), etc.

Basics

Lobbying and Political Activity by Tax-Exempt Organizations
Election Year Activities and the Prohibition on Political Campaign Intervention for Section 501(c)(3) Organizations
Speak for Yourself: Nonprofit Advocacy Toolkit

Miscellaneous Topics

Nonprofits and Lobbying - Yes, They Can!
Permissible Election Activities Checklist

General Resources

Minnesota Council of Nonprofits' "Principles and Practices", scroll down to section on lobbying
An Introduction To Lobbying By Charities

To Audit Your Taxation (and Legal) Practices

Legal Indicators.

Be Careful: When Hiring, Need Independent Contractor or Employee?

The IRS seems increasingly skeptical about business use of independent contractors. The IRS is concerned, for example, that businesses might be avoiding employment taxes by using independent contractors instead. Therefore, businesses must be careful when determining if they should hire a contractor or an employee. The following link will help you in this regard.
Potential Issues in Hiring Consultants (general information and IRS-related issues)


General Resources

IRS Service Center (dedicated to exempt organizations) -- Call 877-829-5500
U.S. Tax Code
Nonprofit Resource Center


Submit a link


For the Category of Taxation (Nonprofit):

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