Compliance Requirements for Tax-Exempt Organizations
Once your organization has received its tax-exempt status from the IRS, you will want to make sure that you comply with all requirements to maintain the status.
The loss of your tax-exempt status means that you are no longer legally operating as a nonprofit organization. Donors will no longer be able to receive e a charitable deduction for giving to your organizations, grantors will likely stop providing support to you, you will be required to pay income taxes on your earnings, and you will lose other tax exemptions reserved for nonprofit organizations.
To ensure your organization does not lose its tax-exempt status, here are some things that you need to make sure you do and others to make sure you do not do.
Federal Compliance
Internal Revenue Service (IRS)
- Maintaining Tax-Exempt Status. A 501(c)(3) must primarily engage in activities that align with its exempt purpose. Straying from the approved purpose can lead to the loss of tax-exemption.
- Political Activity. Political activity is strictly prohibited for 501(c)(3) organizations, and involvement in campaigns can result in revocation of tax-exempt status.
- Some lobbying is allowed but cannot be considered to be a substantial part of the organization’s activities. Too much lobbying may jeopardize tax-exemption.
- Unrelated Business Income (UBI). Revenue from activities unrelated to the organization’s exempt purpose that are regularly carried on and are from a trade or business, such as operating a coffee shop or selling merchandise, may be taxable. A substantial amount of UBI can result in the loss of tax-exempt status.
- Annual Filing Requirements. 501(c)(3) organizations must file either Form 990-N, 990-EZ, or 990 depending on their annual revenue. Private foundations must file Form 990-PF. Failure to file for three consecutive years leads to automatic revocation of tax-exempt status.
- Employment Taxes. All 501(c)(3) employers must report and deposit employment taxes (FICA, income tax, etc.). 501(c)(3) organizations are specifically exempt from paying FUTA.
- Charitable Contributions. Contributions over $250 require written acknowledgment to be deductible by donors. It is best practices for the nonprofit to automatically provide these to their donors. However, nonprofits are required to provide a written acknowledgement for quid pro quo payments of $75 or more.
Office of Management and Budget (OMB)
- Single Audit Requirement. Non-federal entities spending $1,000,000 (effective October 1, 2024) or more in federal awards in a fiscal year must undergo a Single Audit. The audit report and Form SF-FAC must be submitted to the Federal Audit Clearinghouse within a required period of time each year.
State of Indiana
Indiana Secretary of State
- Business Entity Report. Nonprofits must file this report biennially to maintain active status, including updates on business address, registered agent, and officers.
Indiana Department of Revenue
- Board Member Requirements. Indiana law mandates at least three directors for nonprofit boards, with officers such as president, treasurer, and secretary.
- Sales Tax on Purchases. Nonprofits may qualify for sales tax exemptions on purchases related to their exempt purpose. To maintain this exemption, Form NP-20R must be filed every 5 years.
- Sales Tax on Sales. Nonprofits selling goods or services (e.g., merchandise, tickets) must comply with sales tax rules. As of July 2023, organizations earning over $100,000 in sales must collect sales tax unless exempt.
Local Compliance
Allen County Assessor
- Nonprofits may be exempt from paying property taxes; however, an exemption must be filed and accepted. Annual property tax forms must still be filed with the Assessor’s office, even if an exemption from paying taxes is received.
Penalties for Non-Compliance
- IRS Penalties. Failure to comply with 501(c)(3) requirements can lead to excise taxes, late fees for overdue forms, and the loss of tax-exempt status.
- Indiana Penalties. Late filing of the Business Entity Report or failure to comply with sales tax requirements can result in the loss of the sales tax exemption or administrative dissolution.
By staying compliant with these federal, state, and local regulations, your organization can continue to operate efficiently and maintain your tax-exempt status.
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