The right nonprofit accounting solutions can keep your information organized so that it’s easy to file paperwork on time.
The right nonprofit accounting solutions and software offer more than the convenience of easy reports and financial management. They can offer you peace of mind. When the information you need to file with the state is easy to access, it’s easier to comply with annual reporting needs and other steps to take to secure and maintain your tax-exempt status.
Have You Lost Tax-Exempt Status?
It’s a sinking feeling when you learn your nonprofit’s tax-exempt status has been denied. You’ve got two tasks before you now: discovering how it happened so you can prevent it from happening again in the future and then appealing the decision to get your nonprofit’s tax-exempt status active again. Don’t let too much time elapse before you explore the facts around this problem. Get moving and get it fixed!
What Does Tax-Exempt Status Mean?
Non-profit status is granted to your organization by the state. It is a business designation, not a tax designation. Once your organization has non-profit status, you can then apply for tax-exempt status.
Tax-exempt status means that organizations are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. Organizations granted tax-exempt status are free from paying taxes such as property taxes as well as paying state or local business sales and income taxes.
Nonprofit organizations are not automatically granted tax-exempt status. Each must apply for this status independently of receiving their corporate charter and paperwork.
Lost Your Tax-Exempt Status? A Few Reasons Why
The IRS lists six reasons why you can lose your tax-exempt status. These fall into the following categories:
- Benefiting from charitable activities: This is the biggest reason why nonprofits lose tax-exempt status: when people or groups derive personal benefits from charitable activities. As a nonprofit organization, the benefits derived from your organization must support your mission, not your mansion! In other words, profits derived from activities of the nonprofit should flow directly back into programs and projects that support the constituents you serve.
- Lobbying: Nonprofits must not engage in political lobbying.
- Political activity: Nonprofits must also refrain from any other political activities.
- Unrelated business income: Income that’s derived from avenues not directly related to your nonprofit’s mission or activities can also be cause for losing tax-exempt status.
- Failing to file an annual report: Even if your organization doesn’t have to pay an annual income tax, in order to maintain your tax-exempt status, the government requires specific information be reported each year. Failure to file an annual report can be problematic because it contains much of the required information to maintain tax-exempt status.
- Deviating from tax-exempt purposes: An organization sets forth specific reasons why it should be tax-exempt. Deviating from these purposes, or changing too much of what it does, is another reason it can lose tax-exempt status.
Regaining Tax Exempt Status
Loss of tax-exempt status can be a serious problem for nonprofit organizations. After discovering the problem, it’s time to get moving to fix it.
First, examine all aspects of your organization to determine why the status was lost. It may be worthwhile to hire an independent auditor to review the accounting data. Use nonprofit accounting solutions and software to examine every line item, program budget, and income stream to see where it is coming from and where it is going, and address anything that steps out of line with accepted norms for tax-exempt status.
The leadership team should also be onboard with understanding how tax-exempt status was lost. They must commit again to the organization’s mission and vision and keep a careful watch on the activities moving forward.
The National Council on Nonprofits recommends that you consult the IRS’s publication, Revenue Procedure 2014-11, and consult with your accounting firm for help regaining your nonprofit status. You must also clearly communicate with your members and donors, who may worry that their donations or dues aren’t being used properly. Let them know what is going on and the steps you are taking to fix the problem.
Take the following steps to safeguard nonprofit status:
- Maintain accurate records in a central location, and update those records periodically.
- File all paperwork at the state and federal levels by the due date. Leave nothing to chance. Make it a priority!
- Screen all potential new projects according to the rubric of how well they meet your current mission. Be tough. If they don’t fit the mission, you may need to pass on them.
- Make sure that no one at your organization derives monetary gain from their work at the organization. Make it clear as part of your HR policies that such actions aren’t tolerated.
- Hire external counsel, such as a CPA firm, to review your annual reports and your record keeping. An annual audit conducted by a reputable firm is a necessity.
It can be disheartening to learn that your organization has lost its nonprofit status. Take steps to rectify the situation and prevent future problems, clearly communicate those steps to your constituents, and soon you should be back on track to serve the people or causes that need you the most.
RBP Methods helps right-brained people navigate a left-brained world. Nonprofit accounting solutions including software for accounting, financial management, fundraising, donor and grant management can help you maintain better control of your organization’s finances to maintain tax-exempt status. To discuss such solutions, we invite you to contact us through our website or call 503-648-9051.