7 Tips for Maintaining Your Tax Exempt Status
- File your annual information returns with the IRS. Your organization must file a Form 990, 990-EZ, or 990-N, depending on its gross receipts and total assets. A few organizations, for example churches, do not have a filing requirement. For details on which organizations must file, which form to use, and how to complete the form, see the IRS website.
- If you are soliciting contributions from individuals, provide a written receipt and register and file annual reports with the states. A donor should be given a written acknowledgement of any gift of more than $250 to take a tax deduction. You must provide the fair market value of any goods and services provided. The registration and annual filing forms (BCO-10) and requirements are available here. For more information on other state-specific registration requirements, the IRS provides a collection of links to state government websites.
- Adopt and follow a process for approving contracts and compensation agreements with insiders (officer, directors and employees). Your organization’s activities must serve the public and not private interests. All business arrangements with individuals in a position to influence the organization must be approved by independent persons; commercially reasonable, and not in excess of fair market value.
- Understand and avoid the restrictions on lobbying activities. You risk losing your tax exempt status if your organization engages in substantial lobbying. The federal and state restrictions and registration requirements are complex and require record-keeping of the activities and the expenses.
- Refrain from all political campaign activity. An organization may not engage in any activity that favors a candidate for public office. This includes campaign contributions, endorsements, and public statements for or against a candidate. It also includes business activities such as selling or renting mailing lists, leasing office space, or accepting paid political advertising that are not available to all candidates on an equal basis.
- Unrelated business income: A 501(c)(3) organization must pay taxes on unrelated business income. Unrelated business income is income produced by a regularly carried on trade or business that does not substantially relate to the organization’s exempt purpose. An organization that earns more than $1,000 during the year and generates unrelated business income should file Form 990-T and pay taxes on the income. Form 990-T is available here. For details on exceptions, exclusions, and deductions associated with unrelated business income, see the IRS website.
- If you’re unsure, consult an attorney! It is very important to understand that while this list includes most of the major issues that nonprofits face while trying to maintain their tax-exempt status, it is far from comprehensive. For more information on how to maintain tax-exempt status, the IRS provides five interactive online courses. Also, Philadelphia VIP’s LawWorks Project provides pro bono attorneys to eligible nonprofits for their transactional legal needs. Don’t go to the trouble of tackling the legal system on your own – you can find more information about LawWorks here.
Prepared by Jean Hemphill, Esq. and Nicole Callan, a summer associate, of Ballard Spahr, through the LawWorks Project of Philadelphia VIP.