Nonprofit Industry Specific Tax Regulations
1. Tax-Exempt Status (501(c)(3))
- What It Is: Nonprofits can apply for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, which exempts them from federal income tax.
- Who It Applies To: Charitable, religious, educational, scientific, and literary organizations, as well as some other types of nonprofits.
- Tax Implications: Once granted 501(c)(3) status, the organization is exempt from federal income tax on income related to its exempt purposes. But does not exempt you from filing.
- What It Is: UBIT applies to income generated from activities unrelated to the nonprofit’s exempt purpose.
- Who It Applies To: All nonprofits with income from unrelated business activities.
- Tax Implications: Nonprofits must pay tax on unrelated business income, and failure to properly report such income can jeopardize tax-exempt status.
- What It Is: Many states and localities provide additional tax exemptions for nonprofits, such as sales tax and property tax exemptions.
- Who It Applies To: Nonprofits may need to apply for these exemptions separately from their federal tax-exempt status.
- Tax Implications: These exemptions can significantly reduce operating costs, but nonprofits must comply with state and local filing requirements.
- What It Is: Donations to 501(c)(3) organizations are typically tax-deductible for the donor.
- Who It Applies To: Organizations with 501(c)(3) status.
- Tax Implications: Nonprofits must provide donors with proper receipts and documentation for tax-deductible contributions, including special rules for non-cash donations.
- What It Is: Most tax-exempt organizations must file an annual information return with the IRS, known as Form 990.
- Who It Applies To: Nonprofits with gross receipts over $50,000 (Form 990-EZ for smaller organizations).
- Tax Implications: Failure to file Form 990 can result in penalties and loss of tax-exempt status after three consecutive years of non-filing.
- What It Is: To maintain 501(c)(3) status, a nonprofit must pass a public support test, demonstrating that a significant portion of its income comes from the public.
- Who It Applies To: Nonprofits that are classified as public charities rather than private foundations.
- Tax Implications: Failing the public support test may result in the organization being reclassified as a private foundation, subject to different tax rules.
- What It Is: Nonprofits are prohibited from using their earnings to benefit private individuals (private inurement) or providing excessive benefits to insiders.
- Who It Applies To: All tax-exempt organizations.
- Tax Implications: Violations can lead to the revocation of tax-exempt status and excise taxes on the individuals involved.
- What It Is: 501(c)(3) organizations are subject to strict limits on lobbying activities and are prohibited from engaging in political campaigning.
- Who It Applies To: All 501(c)(3) organizations.
- Tax Implications: Excessive lobbying or any political campaign activity can result in the loss of tax-exempt status and imposition of excise taxes.
- What It Is: Nonprofits that receive grants, particularly from government sources, must comply with specific reporting and audit requirements.
- Who It Applies To: Nonprofits receiving federal, state, or large private grants.
- Tax Implications: Properly managing and reporting grant funds is essential to maintain compliance and future funding eligibility.
- What It Is: Nonprofits that engage in charitable gaming (e.g., raffles, bingo) or fundraising events must comply with specific regulations and may be subject to taxes on certain activities.
- Who It Applies To: Nonprofits conducting gaming or special events.
- Tax Implications: Some income from these activities may be subject to UBIT, and organizations must ensure compliance with state gaming laws.
- What It Is: Excess benefit transactions occur when a nonprofit provides an economic benefit to an insider (e.g., a board member) that exceeds the value received by the organization.
- Who It Applies To: All tax-exempt organizations.
- Tax Implications: These transactions can lead to excise taxes on the individual receiving the excess benefit and on organization managers who approved the transaction.
- What It Is: Nonprofits must properly classify stipends and reimbursements to volunteers to avoid unintended tax liabilities.
- Who It Applies To: Nonprofits providing stipends, reimbursements, or other payments to volunteers.
- Tax Implications: Misclassifying payments as non-taxable when they should be taxable can result in penalties and back taxes.
- What It Is: Donor-advised funds allow donors to make charitable contributions and recommend grants over time, while restricted gifts must be used according to donor specifications.
- Who It Applies To: Nonprofits receiving large donations or managing donor-advised funds.
- Tax Implications: Nonprofits must ensure compliance with donor restrictions and IRS regulations regarding donor-advised funds to avoid penalties.
- What It Is: Nonprofits engaging in activities or receiving donations from foreign sources must comply with additional reporting and regulatory requirements.
- Who It Applies To: Nonprofits with international programs or foreign donors.
- Tax Implications: These activities can trigger foreign reporting requirements, and failing to comply can result in significant penalties.
- What It Is: Nonprofits must comply with payroll tax regulations and ensure proper classification of workers as employees or independent contractors.
- Who It Applies To: Any nonprofit with paid staff.
- Tax Implications: Misclassification or failure to pay payroll taxes can lead to significant penalties and back taxes.
- What It Is: Nonprofits must provide proper substantiation to donors for contributions, particularly for non-cash donations or gifts over certain thresholds.
- Who It Applies To: Nonprofits receiving donations.
- Tax Implications: Failure to provide proper documentation can result in penalties and impact the donor’s ability to claim tax deductions.
- What It Is: Nonprofits with significant revenue or receiving government funding may be subject to mandatory audits.
- Who It Applies To: Nonprofits exceeding certain revenue thresholds or receiving federal grants.
- Tax Implications: Audits ensure compliance with financial and tax regulations, and failing an audit can jeopardize funding and tax-exempt status.
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Nonprofits should work closely with a tax professional familiar with the specific regulations affecting their operations to ensure compliance and optimize their tax strategy. This is crucial for maintaining their tax-exempt status and fulfilling their mission effectively.
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State Tax Implications for Texas
Texas State Franchise Tax
If you are an LLC registered in Texas you will need to file a franchise tax return for years 2023 and prior.
New Filing Requirements for 2024
The no tax due threshold is increased to $2.47 million and certain filing requirements are eliminated.
Taxpayers Under the No Tax Due Threshold
For reports originally due on or after Jan. 1, 2024, a taxable entity whose annualize total revenue is less than or equal to $2.47 million is not longer required to file a No Tax Due Report. However, the entity is still required to file the Public Information Report or Ownership Information Report.
Specific to Nonprofits you can apply for exemption status and not have to file annually. We can help with that.
REINSTATING OR TERMINATING A BUSINESS
Both Texas-formed and out of state entities registered with the Texas Secretary of State (SOS) must satisfy all state tax filing requirements before they can reinstate, terminate, merge or convert a business. Note the filing due dates to avoid late penalties.
We can help with all of this.
If you are an LLC registered in Texas you will need to file a franchise tax return for years 2023 and prior.
New Filing Requirements for 2024
The no tax due threshold is increased to $2.47 million and certain filing requirements are eliminated.
Taxpayers Under the No Tax Due Threshold
For reports originally due on or after Jan. 1, 2024, a taxable entity whose annualize total revenue is less than or equal to $2.47 million is not longer required to file a No Tax Due Report. However, the entity is still required to file the Public Information Report or Ownership Information Report.
Specific to Nonprofits you can apply for exemption status and not have to file annually. We can help with that.
REINSTATING OR TERMINATING A BUSINESS
Both Texas-formed and out of state entities registered with the Texas Secretary of State (SOS) must satisfy all state tax filing requirements before they can reinstate, terminate, merge or convert a business. Note the filing due dates to avoid late penalties.
We can help with all of this.
Get started on your required Beneficial Ownership Information Report
(BOI Report to FinCEN)
As part of the Corporate Transparency Act, a new federal mandate requires that businesses file a Beneficial Ownership Information Report to avoid criminal and civil penalties. We can help you to file in a compliant and stress-free way. Most reporting fees are 100.00.
Why do you need to file?
In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new beneficial ownership information (BOI) reporting requirement as part of the US government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
Who needs to file?
All domestic and foreign entities that have filed formation or registration documents with a US state, unless they meet one of 23 enumerated exceptions, including:
EXEMPT: Large operating entities that meet all the following criteria:
When to file?
(BOI Report to FinCEN)
As part of the Corporate Transparency Act, a new federal mandate requires that businesses file a Beneficial Ownership Information Report to avoid criminal and civil penalties. We can help you to file in a compliant and stress-free way. Most reporting fees are 100.00.
Why do you need to file?
In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new beneficial ownership information (BOI) reporting requirement as part of the US government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
Who needs to file?
All domestic and foreign entities that have filed formation or registration documents with a US state, unless they meet one of 23 enumerated exceptions, including:
EXEMPT: Large operating entities that meet all the following criteria:
- Employee more than 20 people in the US
- Had gross revenue (or sales) over $5 million on the prior year’s tax return
- Has a physical office in the US
When to file?
- A company registered business before January 1, 2024 has until January 1, 2025 to file its initial BOI Report.
- A company created or registered in 2024 will have 90 calendar days to file after registration is effective.
- A company created or registered on or after January 1, 2025, will have 30 calendar days after registration is effective.
- Civil penalties are up to $500 per day that a violation continues.
- Criminal penalties include a $10,000 fine and /or up to two years of imprisonment.