Launching your 501(c)(3) and receiving that coveted letter of determination is just the beginning. In order to maintain your 501(c)(3) status, there are compliance regulations you must adhere to. Without complying with these regulations, you can lose your tax exempt status or even have your organization administratively dissolved due to failure to adhere to administrative compliance regulations.
Organizational administrators must be diligent in educating themselves and their board regarding all state and federal regulations. All forms of regulatory compliance can be difficult without regular maintenance of all financial records. All administrators must document every monetary receipt and expenditure. Also, you need to retain supporting documents for all donations received. This includes an organized filing of all grant applications and awards, paid bills, deposit slips, cancelled checks, and sales slips. Proper organization ensures an easier preparation for your year-end financial statements, including your statement of activities (income statement) and statements of financial position (balance sheet).
In order to maintain your 501(c)(3) tax exempt status with the IRS, you must also complete your annually mandated 990 filing. All organizations are required to file regardless of revenue. The type of 990 filed will differ based upon your earnings each year. This means those who earned less than $50,000 will be required to file the 990N. Any organization who earns more than $50,000 in their fiscal year, will be required to file the 990. Your reporting deadline is due on the 15th day of the 5th month after your fiscal year end date. For example, if your organization's fiscal year ends on December 31st, then your 990 or 990N filing will be due on May 15th. Filing can occur any time between these two dates. Inclusion of he 990-T for unrelated business income must also be included if appropriate. This can include filing requirements for supporting organizations.
Wage Filing & Reporting
If your organization has employees who earn wages or salaries, other quarterly filings will also be required. This includes the withholding, deposit, and employment taxes, in addition to federal income tax, Social Security, and Medicare. Every individual who has earned more than $100 per year must be reported on form 941. You may also be required to file annual state tax filings for each employee. Be sure to obtain income tax exemptions or state level sales exemptions at the end of your fiscal year. Not every state requires such filing, so it is important to find our your tax laws in your own state relating to wages and employees. Some states will exempt organizations from state taxes, yet they must still complete an annual return regardless.
Most states require organizations to file an annual report in order to remain an active corporation. Information may be minimal to report, but failure to report can lean to administrative dissolution of the organization.
Charitable Solicitation Registration
Many states require organizations who solicit contributions or donations to file a state level charitable solicitation registration. This is intended to protect consumers from fraudulent charity requests. This will require your organization to register and become licensed prior to soliciting any fundraising activities. There are annual renewals required in most cases, and penalties can occur for violations. If you solicit in multiple states, you must register in each state where representatives will seek donations.
It is critical that you remain abreast of what activities can jeopardize your 501(c)(3) statues. Offenses can include political campaign intervention and private inurement. Private inurement is when an inside party of your organization receives excessive financial gain from the organization's existence. This can be direct financial gain or indirectly through a for-profit business provision of the insider represents ownership interest. Transactions with outsiders can also result in excess benefit. However, it must be substantial in order to truly jeopardize your 501(c)(3) status.
"The IRS expects nonprofits to exist for the public good and not to be created or operated for the benefit, financial or otherwise, of a private individual. Violation of these doctrines can result in heavy taxation and/or loss of nonprofit status." Board Source.
As listed in our previous blog post that lists the various types of 501 status options, 501(c)(3) nonprofits are not allowed to be involved in any political campaign intervention. You may provide voter education or review of issues presented by ALL candidates. However, you are not to directly or indirectly support any one candidate or party for political office. Lobbying activities, however, can be MINIMALLY conducted.
Diligence in annual return filings is critical. The IRS can revoke your exemption status simply as a result of failing to file your annual returns two years in a row. They also reserve the right to impose penalties for filing late. You may not owe taxes, but the late filing standard penalty is $20 per day, with a maximum penalty of $10,000. Failure to file after 3 consecutive years will result in 501 exemption revocation on the third missed return due date. 501's revoked between 2010 and 2017 impacted over 98,000 organizations. This also means these organizations have to reapply and may face additional filing fees.
It can be burdensome to keep up with all of the requirements, but responsible financial reporting and management also means less money spent on penalties and fees. It also means improved donor relations and higher capacity to qualify for grant funding. Foundations will require these documents in order for you to apply for grant funding. So in essence, this should be considered good fiscal hygiene.