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Tax season is complicated. You might think nonprofits would have an easier time, being tax-exempt, but that isn’t necessarily true.
Every year, nonprofits are required to submit their Form 990, which is what allows the organization to maintain its tax-exempt status. As such, the 990 is quite an important document that can cause some issues for your nonprofit if not prepared properly.
This can all get even further complicated when you realize that there are different versions of the 990. How will you know which one to file? What are the differences? How do you get started?
If you’re new to filing a 990 for your organization, you’re probably looking for some direct answers to these critical questions. Not to worry! We’ve got you covered.
In this guide, we will go over the following topics:
- What is Form 990?
- Who is exempt?
- Which versions are there?
- How can I prepare?
- What is e-filing software?
Filing taxes can be a grueling process, even when you are exempt from paying them. Read through this guide and see what you will need to know.
What is Form 990?
Form 990 is an annual IRS tax form required for tax-exempt nonprofit organizations in order to remain tax-exempt.
Once completed by the organization, it becomes a matter of public record. This allows potential donors and other supporters access to the financial information, achievements and goals of an organization before deciding whether to contribute.
Why do I have to file it?
If you are filing as a tax-exempt nonprofit, this form is essential. The government wants to collect as much money in taxes as it can, which means you’re going to have to prove that you deserve to be exempt from paying taxes.
There are two main purposes of the 990:
- It publicizes financial records. This is how both the IRS and constituents are able to make sure that a nonprofit’s top priority is truly pursuing its stated mission. Because you accept donor money, you have to show that you are stewarding it honestly and responsibly.
- It explains your mission and goals. This other aspect of the 990 can work as a sort of PR tool for your organization. You have the opportunity to market your nonprofit in a very succinct way— what you are doing currently and what you would like to do as an organization.
What happens if I don’t?
There are some pretty steep consequences for failing to file your 990 (or filing late).
These penalties can include:
- $20 late fee per day after the deadline, up to a total of $10,000 or up to 5% of your total gross receipts.
- Larger nonprofits (with annual receipts greater than $1,000,000) can suffer even greater fines: $100 per day.
- And if you fail to file your 990 three years in a row, you may lose your tax-exempt, 501(c)(3) status.
Who is exempt?
The exception proves the rule, right? Like with any broad generalization, there are bound to be some nonprofits that are exempt from the 990.
Here’s what you’ll need to know— Although the vast majority of nonprofits are required to file Form 990, these types of nonprofits may be exempt:
- Churches and other faith-based organizations: These may include traditional churches, religious schools, missionary organizations, etc. The IRS defines “church” in a general sense encompassing all places of worship, including for faiths that do not typically refer to their institutions as churches (such as mosques and synagogues).
- Subsidiaries of larger nonprofits: A subsidiary, or an organization owned and controlled by a parent organization, may be exempt from filing a 990 if the parent files a group return. This is analogous to a child who doesn’t file their own taxes but instead is listed as a dependent of their parents. If your nonprofit is a subsidiary of a larger parent organization, check with the parent to see how that might affect your filing requirements.
- Unregistered nonprofits: This might include informal unincorporated nonprofits as well as newer incorporated nonprofits that have yet to fully receive tax-exemption from the IRS. However, if you are a new organization planning on applying for 501(c)(3) status, you must do so within 27 months of your incorporation, and submit Form 990 within that period.
Other potentially exempt organizations include state institutions or government corporations. If you think your organization might be exempt, be sure to double-check with the IRS for the full list of exceptions.
Which 990 versions are there?
There are several versions of Form 990, each differing in length, difficulty, and extent of information requested. Generally, the form you submit will be dependent upon your organization’s gross receipts from the prior year.
The four main variations of Form 990 include:
- 990-N: The simplest variation of the 990, also known as the e-postcard, comes in at only eight questions total and may be completed in about five minutes. Nonprofits eligible for this form are small, with gross receipts less than $50,000.
- 990-EZ: The next step up from the 990-N, the 990-EZ is for nonprofits with gross receipts less than $200,000 and total assets less than $500,000. This form totals four pages, which is still substantially less than the full 990.
- 990: This is the full form, 12 pages long, required for nonprofits with receipts greater than $200,000 or total assets greater than $500,000.
- 990-PF: All private foundations must submit this form, regardless of financial status. This includes both taxable and tax-exempt organizations.
Once you’ve figured out which version is right for your organization, you’ll be ready to begin.
How can I prepare?
If you’re looking to get a head-start that will make your tax season flow smoothly this year, there are quite a few tips and tricks you can take advantage of ahead of time.
Some things you can do to get ready for your upcoming 990 deadline include:
- Keeping updated financial records. One of the most important things you can do going into tax season is to keep your financial records up-to-date. Noting expenses, donations, and other sources of income as they occur will allow you to streamline the final process. It’s going to be a lot easier to file when you have all the information readily available.
- Taking a Form 990 filing course online. The IRS offers an online course extensively explaining the purpose of the 990, how to select the correct version, a how-to on filing electronically and other useful tips straight from the source. This may be an excellent resource to ensure accuracy and answer any lingering questions you may have.
- Not waiting until the last minute. Your 990 isn’t due until the 15th day of the 5th month following the conclusion of your organization’s tax year. However, we do not recommend delaying for too long. You can get started at any time during that five-month period, and we suggest the earlier the better. This can also come in handy if your original form was found to have incorrect or missing information, as you will still have time to adjust before the deadline and avoid any penalties.
Following these three tips will greatly simplify your experience with Form 990 and end up saving you a lot of time and resources in the long run.
What is e-filing software?
One final way to further streamline the 990 process is through e-filing software.
E-filing software can help by sending out automated reminders when the deadline is quickly approaching, as well as double-checking the completeness and accuracy of your 990 before submitting.
- Affordability: You can find respectable e-filers for as low as $40 per filing, which is much less than you would be paying in fees and penalties for not filing or missing your deadline.
- Data security: When sending important information, like your finances, via the internet, you want to make sure that information is going directly to its target. Using an authorized IRS e-filer is one way to ensure the security of your data and avoid any tax return scams.
- Ease of access: This is the main point in an e-filer— turning a complex project into a simple one when the software does most of the difficult parts. You may only have to answer a few questions while the program fills out the rest!
By taking advantage of e-filing software, you are able to free up extra time and resources that can be put towards other projects.
Hopefully, this guide was able to clear up some of the questions you may have concerning your nonprofit’s Form 990 and filing your taxes. As you move towards the next steps in the process, keep in mind these tips and tools are available to create a simpler process for you and your organization. Best of luck!